Text Message Loan Repayment Reminders for Micro-Borrowers in the Philippines

Poor microentrepreneurs have surprised skeptics with their ability to repay loans, but microfinance institutions and commercial banks lending to the poor still struggle with relatively high transaction costs and low rates of return. In “the text message capital of the world,” the Philippines, researchers tested the effect of text message reminders on client repayment rates. In contrast with previous research, they found that text message reminders did not increase repayment on average. Yet for repeat borrowers, who had known their loan officer longer, reminder messages with the officer’s name did result in significantly higher repayment rates.

Policy Issue:

High loan repayment rates have helped fuel the recent and rapid growth in microfinance in the developing world. However, although final default rates are frequently low, late repayment is still a large issue for many lenders. All types of MFIs, from strictly for-profit to mission-oriented, would benefit from inexpensive mechanisms for boosting timely repayment rates and lowering administrative costs per borrower. One such solution may be automated loan repayment reminders sent via text (or SMS) on mobile phones. This study tests the effectiveness of one such intervention in improving repayment and reducing default.

Context of the Evaluation:

Known as the text message capital of the world, the Philippines witnesses the transmission of over 1 billion text messages every day and thus offers a prime setting for testing the effectiveness of text message reminders on improving client repayment rates.

In partnership with the USAID-funded Microenterprise Access to Banking (MABS) and two rural banks in the Philippines, IPA designed a study to test the effectiveness of text message reminders as a tool for boosting repayment among micro-borrowers.  Both banks are for-profit institutions that operate individual-liability microfinance lending programs. All new clients at select branches of both banks who had provided cell phone numbers to the bank and who availed of these loans during the study period were automatically enrolled in the study.  MABS, a national initiative established to expand financial services, provides technical assistance and training to local banks.

Details of the Intervention:

Researchers randomly assigned approximately 1,259 new borrowers who had just received their first loans from their respective banks into a comparison group or one of 12 treatment groups (with various combinations of timing, framing, and personalized messages).  Beyond assessing the overall impact of text reminders, the study was designed to explore the importance of timing, framing and personalization of the text message reminders. Regarding timing, researchers explore whether messages received two days before the due date, one day before the due date, or on the due date itself prove to be the more useful for reminding borrowers to pay. Secondly, the framing, or psychology, of the message sent was varied between emphasizing either the benefit of compliance or the cost of non-compliance to motivate repayment. Finally the importance of personalizing the text message was assessed by comparing messages with the account officer’s name with those containing the client’s name.

Over the course of 16 months between January 2009 and April 2010, cell phone numbers and payment due dates were submitted by the three partner banks on a weekly basis to an automated text message application that sent the assigned text message to borrowers on the appropriate date. All loans required payments on a weekly basis, and the average loan term at the Rural Bank of Mabitac was three months, while the average loan term at Green Bank was six months.

Following the enrollment of clients into the study, IPA analyzed bank data through June 2010 to examine differences in repayment rates, instances of default, and late payments across the 12 treatment groups. IPA also analyzed the cost of the text message system to the banks, taking into account loan officer time, cost of the software development, and administrative costs.

Results and Policy Lessons:

The study did not find that text messages reminders increased repayment on average. The timing treatments did not have significant effects relative to the control group, nor significant differences from each other. Nor did framing the message as a loss or gain produce significant improvements relative to the control group, or significant differences from each other.

However, researchers did find that including the loan officer’s name significantly improved repayment. That is, results suggested that this message reduced the likelihood that a loan was unpaid 30 days after maturity by 5.5 percentage points, a 41 percent reduction. The effects of mentioning the loan officer’s name are only significant for borrowers who had been serviced by the same loan officer before.

While most text messages did not work, the results suggest a role for personalrelationships between borrowers and loan officers. For repeat borrowers who know their loan officer, the reminder messages with the officer’s name may trigger feelings of obligation and/or reciprocity to pay back the loan.

Text Message Reminders and Incentives to Save in Bolivia

Policy Issue:

Due to the absence of efficient credit and insurance markets, household savings are often a crucial determinant of welfare in developing countries. Without savings, households have few other mechanisms to smooth out unexpected variations in their income, and so shocks, such as health emergencies, can force households into selling assets or taking on debt. Additionally, since savings are one of the few means to accumulate assets in the absence of credit and insurance markets, the capacity to save becomes one of the main vehicles of social mobility and of enhancing future income-earning possibilities. Many people express a desire to save more in the future, but when the time comes, find it difficult to do so. Financial institutions have designed saving products to help clients commit to saving in the future, however the effectiveness of many such products has yet to be evaluated.

Context of the Evaluation:

The savings rate in Bolivia is low compared to elsewhere in the South American region. Encouraging savings, however, can be costly and risky. Since microfinance institutions (MFIs) often struggle to control costs and are highly risk averse, many MFIs in Bolivia have preferred to recapitalize their loan portfolio with ‘easy money’ such as donor funds and concessionary loans. However, some MFIs in Bolivia are now beginning to realize that, while savings services seem to be more costly and risky relative to other sources of financing, they may be handicapping themselves by not developing robust deposit taking services and the systems to support them. Clients of the for-profit bank Ecofuturo express a clear desire to save: over 56,000 clients held savings accounts in 2008, a greater number even than the approximately 42,500 active borrowers.[1] One of the savings accounts offered by the bank is a “programmed” savings account, which offers clients a favorable interest rate and free life and accident insurance in exchange for making regular deposits and accepting limits on withdrawals.  In particular, clients must make a deposit each month and can withdraw funds from the savings account only in the month of December.   Yet despite the popularity of the savings accounts, over 40% of savings clients fail to deposit each month as required.

Description of Intervention:

Researchers are working with Ecofuturo to measure the effectiveness of sending text message reminders to clients holding these programmed savings accounts.  The evaluation focuses on a specific programmed savings account called Ecoaguinaldo that is similar to a Christmas Savings Club. The Ecoaguinaldo mimicks the aguinaldo, the year-end bonus many salaried Bolivians receive at the year’s end. The Ecoaguinaldo is used by unsalaried workers and those who want to supplement existing savings accounts, as well as by small business owners who wish to ensure that they have sufficient funds to provide their employees with the expected holiday bonus.  Clients typically open an Ecoaguinaldo account at the beginning of the year and withdraw the savings they have accumulated over the year in December. Receiving a lump sum in December allows clients to meet their end-of-the year financial obligations. The text message reminders provide an opportunity to explore what types of messages are most effective at motivating clients to follow through on their desires to save.

Half of the savings clients with a listed cell phone number were randomly selected to receive a monthly text message reminding them about their Ecoaguinaldo account. There were four distinct messages, which combined a mention of either the savings goal (monthly goal amount in order to receive a year end monetary bonus) or the reward (an active and free life insurance product if all monthly deposits made), and framed the message as either a loss or gain.  The messages to the four treatment groups were:

1.   Goal-Gain: Earn your Aguinaldo! With this month's deposit you will be one step closer to reaching your savings goal.

2.   Goal-Loss: Don't fail to earn you Aguinaldo! If you miss this month's deposit you may not reach your savings goal.

3.   Reward-Gain: Earn your reward! Don't forget you deposit this month. Remember, you will earn a reward of X if you make all of your deposits on time.

4.   Reward-Loss: Don't lose your reward! Don't forget you deposit this month. Remember, you will lose your reward of X if you do not make all of your deposits on time.

Half of the people who received messages in 2008 were in the comparison group the next year, so that the impact of receiving messages one year but not the next could be measured. In the last three months of the project in 2008, the number of treatments was doubled to eight. Each of the four original treatments were split in half, and preceded by the phrase “Ecofuturo supports your decision to save,” to one of the halves. Based upon the 2008 results, in 2009 only messages that focused on the reward were sent.

Results and Policy Lessons:

Overall the reminder message increased savings balances weakly (not statistically significant) and the probability of meeting the savings goal of making one deposit a month by 3%. When results are pooled across similar experiments in Peru and the Philippines, we increase the power of our study, finding the same sized effects statistically significant at the 10% level for savings balances and the 1% level for the proportion of clients meeting their goal.  Messages that mentioned the incentives of maintaining your life insurance policy and receiving reward interest were most effective, increasing savings balances by 10%.  We see no difference between the effectiveness of messages framed with “gain” and “loss language.”  Preliminary results from 2009 suggest that the effectiveness of reminders may decrease over time.  The increase in savings due to the reminders was large enough to make it a profitable venture for the bank. Moving forward, reminders will be a standard component to the bank’s programmed savings accounts.



[1] http://www.mixmarket.org/mfi/ecofuturo-ffp

Saving for Health Expenditures in Kenya

Health remains a major barrier to economic development in poor rural areas. Access to effective health products, whether preventive or curative, has so far remained limited due in large part to poverty and the absence of financial markets that would enable poor households to invest in health on credit. Given such constraints, poor households should save in anticipation of future health shocks. However, substantial evidence suggests that they lack adequate savings products, and, as a result, households are quite vulnerable to health shocks. In order to afford medical expenditures, they resort to drawing down productive assets or business capital or to other costly risk-coping strategies.

Policy Issue

The benefits of investing in health are thought to be very high. For example, it has been estimated that 63 percent of under-5 mortality could be averted if households invested in preventative health products. Despite this, investment levels remain quite low in many developing countries. While many people point to credit constraints as the primary impediment, barriers to savings also appear to be a significant obstacle to investing in health. There are several major pathways through which savings may be constrained. Inter-household barriers may be relevant if social norms that necessitate that an individual provide support to friends and relatives if she is asked and has the cash on hand. Intra-household barriers may arise if members of a household have different spending preferences. Intra-personal barriers may arise if an individual’s saving and spending preferences are not constant over time. It is necessary to better understand these pathways and their relative importance so that we may develop more efficient health saving devices.

Context of the Evaluation

The researchers chose to work with a common social structure in the area: a ROSCA (Rotating Saving and Credit Association) - a group of individuals who make regular cyclical contribution to a fund, which is then given as a lump sump to a different member at each meeting. Recent studies reveal very high participation rates in these organizations; across Sub-Saharan Africa, average membership among adults ranges between 50 and 95 percent.i

Details of the Intervention

To estimate the relative importance of the different types of barriers to savings, the researchers randomly varied access to a set of saving devices specifically designed to alleviate one or more of the barriers discussed above. One hundred and thirteen ROSCAs were randomly assigned to five groups: four of the groups were given specific savings devices to use in addition to their regular weekly savings, while the fifth group served as a comparison.

In the first two treatment groups, members of the ROSCAs were given a locked metal box (with an opening in which deposits could be made) in which they could save at home. In the first group – the “Safe Box” group – members were given the key to the lock and could therefore take money from the box whenever they wanted, even to spend on non-health products. In the second group – the “Lock Box” group – members were not given the key and had to call the program officer in order to open the box. Once opened, the money in the box could only be used to buy health products.

The other two treatments were at the ROSCA level. In the third treatment group, individuals were encouraged to use their existing ROSCA to create a “Health Pot” in which members would contribute an additional amount during regular meetings earmarked for health products only. In the fourth group, individuals were encouraged to save in an individual “Health Savings Account” (HSA) that would be held at the ROSCA and earmarked for emergency health costs only (i.e. respondents were only allowed to withdraw this money if they needed it for a health emergency).

In all five groups, participants were encouraged to save for health savings goals. Thus, any effect of a savings product above and beyond the control group should be attributable to the product itself.

Results and Policy Lessons

Overall, the results indicate a significant demand for such savings products. Take-up of all four treatments was extremely high, suggesting that the primary effect of all treatments is simply the provision of a mechanism to protect money from others. 

In terms of health impacts, the researchers looked at two outcomes: (1) how much people invested in preventative health in the year following the program; and (2) whether people had enough money to deal with health emergencies. Note that the Lock Box and Health Pot were geared towards outcome (1), the Health Savings Account was geared towards outcome (2), and the Safe Box was geared to both outcomes.

Investments in Preventative Health: A year after the intervention, individuals in the Safe Box andHealth Pot groups had significantly higher levels of investments in preventative health products than those in the comparison group. Relative to comparison group individuals, the Safe Boxincreased investment by 67 percent, while the Health Pot increased investment by 128 percent. As expected, the Health Savings Account had no effect on this measure. Surprisingly, however, the Lock Box had no effect either. This lack of an effect is because the value of tying up money towards health is outweighed by the cost of completely limiting liquidity (for instance, to deal with unexpected income shocks). 

Coping with Health Shocks: Individuals in the Health Savings Account treatment were less vulnerable to unexpected emergencies. People in the Safe Box group also appeared somewhat less vulnerable, though the effects were not significant at conventional levels. As expected, there was no effect in risk coping in the two treatments groups that were not designed for emergency savings.

Prevalence of Savings Barriers: The results confirm the presence of all three types of savings barriers. First, inter-personal barriers are substantial - those who were previously giving assistance to others without receiving assistance in return benefited more than others. Second, intra-personal barriers also matter. Those whose savings preferences were not constant over time (as measured by survey questions) were not able to benefit from the Safe Box (because it was too easy for them to access the money). They also did not benefit from the Lock Box – this is because even though the savings in the box was illiquid, there wasn’t a strong incentive to actually put money into the box in the first place. However, they did benefit from the stronger commitment and social pressure to make deposits that was provided by the Health Pot. Third, there is some evidence of intra-household barriers. The effects of several of the interventions were larger (though not statistically significantly so) for married individuals. 

 

i Anderson, Siwan and Jean-Marie Baland. 2002. “Economics of Roscas and Intrahousehold Resource Allocation.” The Quarterly Journal of Economics 117 (3): 963-995

    Reducing Barriers to Saving in Malawi

    On average, developing countries have fewer than 20 bank branches per 100,000 adults, and people deposit money at a rate one-third of that in developed countries.[i] This lack of formal financial services, along with many other factors, may inhibit farmers and other entrepreneurs, particularly in rural areas, from increasing savings and investments, and smoothing household consumption. Financial services could help farmers to accumulate funds to purchase tools such as fertilizer which are helpful for increasing production. If barriers to financial services are reduced or eliminated by offering enhanced savings products, what is the impact on the use of different agricultural inputs, farm output, and overall well-being in rural farming households?

    Context:

    Tobacco is one of Malawi’s primary exports, employing many of the country’s farmers. Income volatility influenced by macroeconomic forces can be particularly harmful to those farmers living near the poverty line, causing households to skip meals and forgo necessary healthcare expenses.

    Opportunity International, an international NGO, opened the Opportunity Bank of Malawi (OBM) in 2002 with a license from the Central Bank of Malawi. OBM provides financial services to the rural poor and has partnered with researchers and two private agricultural buyers, Alliance One and Limbe Leaf, to offer enhanced savings products to tobacco farmers.

    Description of Intervention:

    The study assessed the impact of OBM’s savings programs on the behavior and well-being of local farmers. Farmers were organized in farmers clubs, with an average of 10-15 members, by one of the agricultural buyers. In exchange for group loans in the form of fertilizer and extension services, administered by OBM, the club allowed the commercial buyer to make the first offer on the national auction floor, essentially creating an exclusive relationship. Farmer clubs in this sample were randomly assigned to one of two savings account treatment groups or a comparison group. Clubs in the comparison group received information about the benefits of having a formal savings account. Clubs in the treatment groups received the same information about savings accounts and were also offered individual savings accounts into which proceeds, after loan repayment, would be directly deposited.

    Farmers in the first treatment group were offered an “ordinary” savings account with an annual interest rate of 2.5%. Those in the second treatment group received the same individual savings account, in addition to a “commitment” savings account which allows farmers to specify an amount of money to be frozen until a specified date (e.g. immediately prior to the planting season, so that funds are preserved for farm input purchases).

    To assess the impact of public information on financial behavior, farmer clubs in both treatment groups were randomly assigned to one of three raffle schemes providing information about club level savings. Raffle tickets to win a bicycle were distributed to participants on two occasions based on savings balances as of two pre-announced dates. One third of farmers received raffle tickets in private, one third received tickets in public when names and numbers of tickets were announced to the club, and one third was ineligible for the raffle.

    Results and Policy Lessons:

    Savings Behavior: Twenty-one percent of farmers who were offered a commitment savings product (no raffle), made transfers to their account, while 16% of farmers who were offered the ordinary savings product (no raffle) had their harvest proceeds directly deposited into their individual account, and no farmers in the comparison groups received funds directly in an OBM account. Overall, farmers in the six treatment groups deposited substantial amounts into their individual bank accounts; among farmers who were offered the commitment savings account, most of these deposits were made into the ordinary savings account.

    Farmers in the commitment savings group had higher net savings during the pre-planting period, and the commitment savings treatment group overall withdrew more money during the planting season. This finding implies that these farmers were better able to save money and delay consumption until the lean season when food supplies from the last harvest were scarcer. Farmers in the ordinary savings group did not experience an increase in net savings during the pre-planting season, or an increase in withdrawals during the planting season, suggesting they were not able to smooth consumption as effectively.

    Inputs, crop sales, and expenditures: In relation to those in the comparison group, farmers who were offered commitment savings accounts had more land cultivated, higher value of inputs, and greater value of harvest at a statistically significant level. These commitment savings farmers cultivated .33 more acres of land (compared to an average of 4.3 acres of land in the comparison group) and used 17.1% more inputs. This increase in land under cultivation and inputs used by the commitment savings group led to a 20.1% increase in value of crop output above the levels in the comparison group. Finally, farmers in the commitment treatment group increased total expenditures reported in the last 30 days by 13.5%. Overall, farmers in the ordinary savings group did not have outcomes that were different from those in the comparison group at a statistically significant level.

    Evidence suggests that the positive results in the commitment savings group were not due to helping farmers solve self-control problems since most money accrued in ordinary savings accounts and actual commitment account balances were low. There was also no direct evidence that the results were derived from farmers keeping funds from their social networks. Psychological phenomena such as mental accounting may be behind the impact of the commitment accounts. However, the current study does not empirically test this hypothesis and psychological mechanisms are addressed in future research. Results from the public and private raffle treatments were inconclusive.

     


    [i]Consultative Group to Assist the Poor/The World Bank, “Financial Access 2009:  Measuring Access to Financial Services around the World,” http://www.cgap.org/gm/document-1.9.38735/FA2009.pdf(Accessed January 9, 2011).

    For more details, see the Gates Foundation briefing note on this project.

    Transaction Costs, Bargaining Power, and Savings Account Use

    Transaction costs, such as those associated with opening, maintaining, and withdrawing funds may be a barrier to using formal savings accounts for those with low income. Couples in Western Kenya were offered the opportunity to open bank accounts, in the husband’s name, wife’s name or both names jointly.  In addition, a subsample accounts were randomly selected to come with a free ATM card, which lowered withdrawal fees and made the accounts more accessible through ATM machines. Results show that lowering costs via ATM cards significantly increased the use of savings bank accounts owned by men and accounts jointly owned by men and women. In contrast, savings accounts owned by women with low household bargaining power were used significantly less when ATM cards were provided.
     
    Policy Issue:
    Transaction costs such as account opening, maintenance, and operating fees pose significant barriers to the adoption of formal savings by the poor. Recent evidence on commitment savings, however, suggests that individuals may actually benefit from some transaction costs on savings accounts: Both internal and external constraints to saving such as time inconsistent preferences (valuing present over future consumption) and pressures to share resources with other members of the household and community may be reduced when money is locked away and costly to access. These observations raise a number of unanswered questions about the savings behavior of the unbanked: Would making formal sector accounts cheaper and more convenient substantially increase use of these accounts? Would the use of the savings account vary by account type (individual versus joint) or identity of the account owner (husband or wife)? To inform product design, this project aims to understand how the poor respond to reduced transaction costs on formal savings accounts.
     
    Context of the Evaluation:
    ATM cards are a common tool for reducing bank account transaction costs in the developed world as they facilitate withdrawals and, in some cases, are associated with reduced fees. This randomized evaluation assesses the impact of providing ATM cards for savings account holders in Western Kenya. While formal financial services in Kenya have traditionally been outside the reach of the poor, banks have recently begun to offer lower cost formal savings products marketed to a broader swathe of the population. This project was implemented in collaboration with Family Bank, a formal bank in Kenya that offers products suitable for lower income savers.  All study participants were offered Family Bank’s Mwananchi account, which has no recurring fees, a minimum balance of $1.25 US, and no deposit fees. Withdrawal fees are $0.78 US without an ATM card and $0.38 US with an ATM card. The account does not require the purchase of an ATM card, which costs about $3.75 US. In addition to reducing withdrawal fees, the ATM card enables account holders to make withdrawals at any time of the day.
     
    Description of the Intervention:
    Seven hundred forty nine low-income married couples were given the opportunity to open up to three accounts with Family Bank of Kenya: a joint account, an individual account for the husband, and an individual account for the wife. Each account was randomly assigned a temporary 6-month interest rate, which ranged from zero percent to 10 percent. Altogether, these couples opened 1,122 accounts. One quarter of the opened accounts were randomly selected to receive a free ATM card. The cost of the card was prohibitive for the vast majority of the study participants – consequently the “free ATM” treatment increased ATM card take-up by 89 percentage points.
     
    In addition to survey data from one-on-one baseline questionnaires administered during group sessions (which collected basic demographic information, as well as information on individual discount rates and time inconsistency, decision making power in the household, income, and current use of a variety of savings devices.), administrative data on bank account use was also collected for the first six months following account opening.  
     
    In 2012, a follow-up survey was conducted to (1) assess the longer run impacts of ATM cards, (2) determine whether the initial results reflect changes in total savings or substitution between different savings devices, and (3) delve more deeply into the results pertaining to bargaining power and women's account use.  Couples were revisited and spouses were interviewed separately about their savings, assets, income generating activities, and decision making in the household. This survey particularly focused on measuring total household saving and measuring individual bargaining power in the household. In addition, administrative data on Family Bank account use will provide a three year time series of account use for individuals in the study’s sample.
     
    Preliminary Results:
    Using administrative account use data of the six months following the intervention, results showed relatively low overall usage of formal accounts with only 27 percent of the couples who opened accounts saving in at least one of their new accounts.
     
    Data from the three-year follow-up shows that lowering costs via ATM cards significantly increased savings rates (by 8 percentage points) and average daily balances (by 74 percent) in bank accounts owned by men and accounts jointly owned by men and women. In contrast, accounts owned by women with low household bargaining power were used significantly less when ATM cards were provided.
     
    Preliminary results from the follow-up survey indicate the ATM cards had important long-run effects. For example, the ATM treatment significantly increased long-run use of accounts (by 4.1 percentage points). Ongoing research is studying impacts on overall income and asset levels.
     
    These results imply that lowering transaction costs to formal savings will increase access for many savers. However, the findings also suggest that transaction cost saving technologies that make account balances easier to view and access may favor individuals who have more bargaining power within the household, and that incorporating additional security features into transaction-cost reducing technologies (such as biometric scanning) may be a promising way of both reducing costs and making accounts more attractive to individuals with weaker bargaining positions in the household.
    Simone Schaner

    Borrower Responses to Fingerprinting for Loan Enforcement in Malawi

    Can fingerprinting borrowers improve repayment rates? For micro-lending to be viable microfinance institutions need to ensure that their clients repay their loans. We worked with the Malawi Rural Finance Corporation (MRFC) to create a more reliable system for identifying and tracking, by fingerprinting borrowers. Fingerprinting improved repayment rates, especially for those borrowers predicted to have the worst repayment rates.  Fingerprinted borrowers are as much as 40% more likely to fully repay their loan than non fingerprinted borrowers. Borrowers who were fingerprinted also took out smaller loans, perhaps to be sure of their ability to repay. Even with conservative estimates of the benefit of increased repayment and the cost of outsourced fingerprint matching, the results suggest an attractive cost-benefit ratio.

    Policy Issue:                                                                                                                      
    Identity theft is a common crime the world over. In developing countries, the damage caused by identity theft and identity fraud goes far beyond the individual victim, however, and ultimately creates a direct impediment to progress, particularly in credit markets. Biometric technology can help to reduce these problems. A biometric is a measurement of physical or behavioral characteristics used to verify or analyze identity. Common biometrics include a person’s fingerprints, face, iris, or retina patterns; speech; or handwritten signature. These are effective personal identifiers because they are unique and intrinsic to each person, so, unlike conventional identification methods (such as passport numbers or government‐issued identification cards), they cannot be forgotten, lost, or stolen.
    Biometric technology can improve access to credit and insurance markets, especially in countries that do not have a unique identification system to prevent identity fraud—the use of someone else’s identity or a fictitious one to gain access to services otherwise unavailable. In the case of credit, biometric technology can make the idea of future credit denial more than an empty threat by making it easier for financial institutions to withhold new loans from past defaulters and reward responsible past borrowers with increased credit.
     
    Context of the Evaluation:
    With 80% of its population residing in rural areas, Malawi’s economy is focused on agriculture.1 In these rural areas where there is limited access to credit, farmers, often have difficultly investing in agricultural inputs such as fertilizer that can dramatically increase harvest size.  
     
    To fill this gap in demand for credit, Malawi Rural Finance Corporation (MRFC), a government-owned microfinance institution, provides a loan product designed for farmers purchasing “starter kits” from Cheetah Paprika Limited (CP). CP is a privately owned agri‐business company that offers extension services and a package of seeds, pesticides, and fungicides at subsidized rates in exchange for farmers’ commitment to sell the paprika crop to CP at harvest time. The MRFC loans, roughly 17,000 Malawi Kwacha (approximately US$120), come in the form of vouchers, allowing borrowers to collect inputs from pre-approved suppliers who directly bill MRFC. Expected yield for farmers using two bags of fertilizer, the maximum quantity covered by the loan, on one acre of land is between 400‐600kg, compared to 200kg with no inputs.
     
    Details of Intervention:
    Smallholder farmers organized in groups of 15‐20 members applied for agricultural input loans to grow paprika and were randomly allocated to either a treatment or comparison group. The study sample covered four districts of the country and consisted of 249 clubs with approximately 3,500 farmers. In keeping with standard MRFC practices, farmers were expected to raise a 15% deposit, and were charged interest of 33% per year (or 30% for repeat borrowers).
     
    After the baseline survey was administered to individual farmers gathering information about demographics, income, assets, risk preferences, and borrowing activities, a training session was held for all clubs on the importance of credit history in ensuring future access to credit. Then, in treatment clubs only, fingerprints were collected as part of the loan application and an explanation was given that this would be used to determine their identity on any future loan applications. Farmers in treatment clubs were given a demonstration of how a computer could identify an individual with a fingerprint scan. In the absence of fingerprinting, identification of farmers relied on the personal knowledge of loan officers.
     
    MRFC loan officers, informed of which groups were fingerprinted, proceeded with normal loan application screening and approval. An endline survey was administered after the harvested crops were sold to CP.
     
    Results:
    Within the subgroup of farmers who had the highest default risk, based on risk taking and default behavior, fingerprinting led to increases in repayment rates of about 40 percent. In contrast, fingerprinting had no impact on repayment for farmers with low default risk.  Fingerprinted borrowers requested smaller loans amounts and devoted more land and inputs to paprika, thus diverting fewer resources to other crops compared to their non‐fingerprinted counterparts.
     
    A rough cost‐benefit analysis of the pilot experiment suggests that the benefits from improved repayment greatly outweigh the costs of biometric equipment and fingerprint collection, which accounts for basic training and the time for credit officers to collect biometric data. The benefit‐cost ratio is 2.27.
     
    This study suggests, therefore, that lending institutions may reap benefits by using biometric technology to identify borrowers and enforce loan repayment.
     
    1 CIA World Factbook, "Malawi." Available from https://www.cia.gov/library/publications/the-world-factbook/geos/mi.html

     

    Access to Savings in Nepal

    The majority of the poor lack access to bank accounts and rely on informal savings mechanisms (Banerjee and Duflo 2007)1. There is little evidence on how poor households’ behavior changes when offered access to a traditional savings account. Would poor households open a basic savings account if given access to one? Would this access help them accumulate small sums into increased savings over time? In this field experiment households in 19 slums in Nepal were randomly offered simple bank accounts with no fees at local bank branches. Results show that there is untapped demand for savings accounts. Access to the savings accounts increased monetary assets and total assets without crowding out other kinds of assets or formal savings in institutions. Finally, households with this new financial access increased investments in education.   

    Policy Question:

    The potential benefits of a formal savings account are manifold and include improved ability to cope with shocks, asset accumulation and capacity to plan for the future. There has been promising though limited evidence to date on the benefits of access to savings accounts for the poor. Additionally, such studies have thus far focused on specific subsets of the population such as entrepreneurs or, for commitment savings studies, existing clients of a bank or microfinance institution. The current literature lacks studies that consider how generally poor households’ behavior changes when offered access to financial markets through a savings account.

    Context of the Evaluation:

    This study takes place in Pokhara, Nepal in 19 areas commonly referred to as slums. The slums, which are actually permanent settlements, vary in population from 20 to 150 households. At the time of the study baseline, households in these areas had an average weekly salary of 1,600 Nepalese rupees, roughly $20 USD. Study participants were primarily involved in the agricultural and construction industries, engaged in activities such as collecting sand and stones, selling produce, and raising livestock. Researchers collaborated with a local NGO, Good Neighbour Service Association Nepal (GONESA), as it was offering savings products in new locations, to assess the impact on the population. 

    Description of the Intervention:

    A baseline survey was administered to 1,236 households. Shortly thereafter, public lotteries were held to randomly offer new savings accounts at a local GONESA branch to half of the surveyed households. The other half served as a comparison group and was restricted from opening accounts.

    The new bank branch offices in the 19 slums are open twice a week for three hours on an established schedule. Customers cannot make deposits or withdrawals outside these hours at the branches, but they can visit the bank's main office at the city center all days of the week. The bank accounts have no opening or transaction fees and pay 10% annualized interest rate to customers.

    One year after the accounts were opened, an endline survey was administered to both the beneficiaries and comparison group participants to collect data on consumption levels, financial behavior, and asset accumulation, among other indicators. Administrative data were also collected from GONESA on savings account usage at the individual level which includes the date, location, and amount of every deposit and withdrawal. 

    Results and Policy Lessons:

    This field experiment provides detailed evidence on the causal effects of access to a fully liquid bank account on savings and investment behavior. Results show first, that there is untapped demand for fully liquid savings accounts: 84 percent of the households that were offered the account opened one. Second, the poor can save: 80 percent of the households that were offered the account used it frequently, making deposits of about 8 percent of their weekly income 0.8 times per week, on average.

    Third, a year after the start of the intervention, households with access to the GONESA savings accounts had 25% more monetary assets than households who did not have access. In addition, their total assets, which include monetary and non-monetary assets (consumer durables and livestock), were 12% higher than the ones of comparison households. Hence, the increase in monetary assets did not seem to come at the cost of crowding out savings in non-monetary assets.

    Fourth, being offered access to a savings account strongly increased household investment in education. Furthermore, households with access to the savings account who had suffered health shocks in the previous month did not seem to suffer large changes in weekly income, suggesting that having savings may serve as a buffer against adverse circumstances.

    Overall, findings suggest that if given access to a basic savings account with no fees, poor households save more than those who only have informal strategies at their disposal. They accumulate greater assets and invest more in education. These results highlight that savings accounts can be beneficial even when the households do not use the money saved for microenterprise development because they permit households to make productivity-enhancing investments in human capital.

    1 Banerjee, Abhijit V., and Esther Duflo. 2007. “The Economic Lives of the Poor.” Journal of Economic Perspectives, 21(1): 141–167.

     

     

    Silvia Prina

    Using Encouragement to Overcome Psychological Barriers to Saving in Peru

    This research examines whether bank marketing and communication tools can help individuals save more and, in particular, switch from informal savings vehicles to formal sector methods (e.g., a bank account). In conjunction with Caja Municipal de Ica (CMI), IPA examines various methods of product design, beyond the financial incentive, of encouraging clients to complete their savings commitment.

    Policy Issue:

    Microfinance has generated worldwide enthusiasm as a possible strategy to help people living in poverty get the resources they need to start a business, receive additional education, or make investments. While much of the focus of microfinance has been on microcredit, formal savings services can also have a dramatic impact on the lives of the poor. Savings are important both as insurance in the case of illness or other economic shocks, and as a way to purchase productive assets. Savings can also substitute the need for loans among clients who have enough funds to finance their expenditures themselves. But savings strategies are less tested than credit services, and microfinance institutions struggle to effectively expand their savings services.

    Context of the Evaluation:

    The semi-urban poor living in Ica and Ayacucho, cities in southern Peru, often earn income through small enterprises and self-employment. In Ica, agriculture represents the most important industry, while Ayacucho is well known for its artisans and handicrafts. Many of the poor in this part of Peru save through informal means. They often keep savings in their own homes, a practice referred to as a colchón banco (mattress-bank), or join Merry-go-Round savings groups called ROSCAs, where members pool their money into a pot, and each week or month a different member takes home the pot.  Due to their informal nature, both of these savings practices can be risky and unreliable.

    Details of the Intervention:

    Researchers will examine whether an initiative to promote savings can help individuals save more and switch from informal savings to formal sector methods. The study is implemented by the Caja Ica, a bank designed to serve the needs of poor clients with microsavings and microcredit programs, with program support from Catholic Relief Services (CRS) and technical assistance from COPEME. The Caja Ica is offering a new commitment savings product called “Ahorro Programmado”. Clients who choose to participate in this service commit to saving an amount of their choosing, amounting to at least 20 soles (US$6.50) per month for 6, 12, 18, or 24 months. As an incentive for meeting their savings commitment, clients receive a preferential interest rate of more than twice what the normal interest rate is for savings accounts.

    This research will examine various product designs, beyond the already increased financial incentive, to see which are more effective at encouraging clients to complete their savings commitment. Each of the estimated 5,000 clients expected to enroll in the program will be randomly assigned to receive one or more of the following: (1) reminder letters before the due date of their payment, (2) token gifts upon payment to bring forward the "benefit" of saving, (3) positive or negative incentive messages on each deposit slip, or (4) no services, serving as a comparison. This study will determine the commitment device that most effectively encourages clients to meet their savings goals.

    Results and Policy Lessons:

    Clients began opening bank accounts in February 2006. The last group to be tracked completed their savings commitments in Oct 2007.  Preliminary results indicate that sign-up gifts, letters, and deposit slips all increased the probability that clients would reach their savings goal by several percentage points.  However, negatively framed messages appear to be more effective than the corresponding positive messages in getting people to save.

     

    Impact of Rural Microcredit in Morocco

    This project is one of the few to rigorously evaluate the impact of a microcredit program. It takes advantage of the expansion of Al Amana, Morocco's largest microfinance institution, into rural areas of Morocco where access to formal credit is very low. 50% of households sampled in initial surveys indicated that they were in need of credit in the previous year, but never actually requested it.

    Policy Issue: 

    Microcredit is the most visible innovation in anti-poverty policy in the last half-century, and in three decades it has grown dramatically. Now with almost 130 million borrowers, microcredit has undoubtedly been successful in bringing formal financial services to the poor. Many believe it has done much more, and that by putting money into the hands of poor families (and often women) it has the potential to increase investments in health and education and empower women. Skeptics, however, see microcredit organizations as extremely similar to the old fashioned money-lenders, making their profits based on the inability of the poor to resist the temptation of a new loan. They point to the large number of very small businesses created, with few maturing into larger businesses, and worry that they compete against each other. Until recently there has been very little rigorous evidence to help arbitrate between these very different viewpoints.

    Context of the Evaluation: 

    Those who live on less than 2 dollars a day represent 19% of the population in the dispersed rural areas of Morocco. In the past, most microfinance services in Morocco have been concentrated in the urban and peri-urban areas, while people in rural areas used various forms of informal credit. The level of access to formal credit from a bank or financial institution is very low in these locations: the initial surveys of this project have shown that only 2.5% of those in Morocco living on less than 2 dollars a day borrow from formal credit sources.

    Between 2006 and 2007, Al Amana opened around 60 new branches in sparsely populated rural areas . The main product Al Amana offers in rural areas is a group-liability loan, and, since March 2008 , individual loans for housing and non-agriculture businesses were also introduced in these areas. Groups are formed by three to four members  who agree to mutually guarantee the reimbursement of their loans, with amounts ranging from $124 to $1,855  USD per group member. Individual loans are also offered, usually for clients that can provide some sort of collateral.

    Details of the Intervention: 

    Within the catchment areas of new MFI branches opened in areas that had previously no access to microcredit, 81  pairs of matched villages were selected. Within each pair, one village was randomly selected to receive microcredit services just after the branch opening, while the other received service two years later.

    The baseline survey was grouped in four waves to follow Al Amana’s timeline of branch openings between 2006  and 2007 . Data on socio-economic characteristics, households’ production, members’ outside work, consumption, credit, and women’s role in the household was collected among a sample of households. An endline survey was administered two years after Al Amana intervention started in each wave.

    By the time of the endline survey, 16%  of surveyed households living in treatment villages had taken a loan from Al Amana. Three-fourths  of those who had taken loans from Al Amana received group-liability loans, and borrowers were predominantly men. Households in areas where credit was offered had borrowed an average total of $117 USD  from Al Amana at the endline, at an average of about $964 USD per loan.

    Results and Policy Lessons: 

    Al Amana program increased access to credit significantly: households were more than twice  as likely to have a loan of some kind in treatment villages relative to comparison villages. The main effect of improved access to credit was to expand the scale of existing self-employment activities of households, including both keeping livestock and agricultural activities.

    Among livestock-rearing households, there was an increase in the stock of animals held, and households appeared to diversify the types of animals they held and the types of livestock products sold. This leads to an increase in sales and self-consumption, but no increase in profits. Agricultural sales and profits also increase, but households did not appear to expand into new sectors or create new businesses. A fraction of the extra profits were saved, while another fraction were offset by reduced wage earnings, and so on there was no average effect on consumption across all households.

    Treatment effects vary significantly depending on whether a household had an existing self-employment activity at baseline. Households that had a pre-existing activity decrease their non-durable consumption (social expenditures) and consumption overall. This group saves more and borrows more from Al Amana, which is consistent with the need to fund the expansion of their activities. But households that did not have a pre-existing activity increased their food and durable expenditure (with no effect on overall consumption) and, did not see any change in their business outcomes.

    The Impact of Microcredit in the Philippines

    This is one of a handful of new studies which provide a rigorous estimate of the impact of microfinance. Accepted applicants used credit to change the structures of their business investments, resulting in smaller, lower-cost, more profitable businesses. So while business investments did not actually increase, profitability did increase because the capital allowed businesses to be reorganized. This happened most often by shedding unproductive employees.

    The results also highlight the importance of replicating tests and program evaluations across different settings. We are working towards that goal, and are currently implementing microfinance impact studies in Morocco,  as well as continuing studies in the Philippines. See here for other studies on varying interest rates in Mexico, Peru and South Africa

     
    Policy Issue: 

    Microcredit, or the practice of providing very small loans to the poor, often with group liability, is an increasingly common tool intended to fight poverty and promote economic growth. But microlending has expanded and evolved into what might be called its “second generation,” often looking more like traditional retail or small business lending where for-profit lenders extend individual liability credit in increasingly urban and competitive settings. The motivation for the continued expansion of microcredit is the presumption that expanding credit access is an efficient way to fight poverty and promote growth. Yet, despite optimistic claims about the effects of microcredit on borrowers and their businesses, there is relatively little empirical evidence on its impact.

     
    Context of the Evaluation: 

    First Macro Bank (FMB) is a for-profit lender that operates in the outskirts of Manila. A second generation lender, like many other Filipino microlenders, FMB offers small, short-term, uncollateralized credit with fixed repayment schedules to microentrepreneurs. Interest rates at this bank are high by developed country standards: several up-front fees combined with a monthly interest rate of 2.5 percent produce an effective annual interest rate greater than 60 percent.

    The borrowers sampled in this study are representative of most mircrolending clients; they lack the credit history or collateral which are needed to borrow from formal financial institutions like commercial banks. Most clients are female (85 percent), and average household size (5.1 individuals), household income (nearly 25,000 Filipino pesos per month), and levels of educational attainment (44 percent finished high school and 45 percent had postsecondary or college education) were in line with averages for the area. The most common business owned by these clients is a sari-sari store, or small grocery/convenience store (49 percent own one). Other popular occupations among clients are in the service sector, such as hair dressing, barbering, tailoring, and tire repair.

     

    Details of the Intervention: 

    The researchers, with FMB, used credit-scoring software to identify marginally creditworthy applicants based on business capacity, personal financial resources, outside financial resources, personal and business stability, and demographic characteristics. Those with scores falling in the middle comprised the sample for this study, totaling 1,601 applicants, most of whom were first time borrowers. They were randomly placed in two groups: 1,272 accepted applicants served as the treatment and 329 rejected applicants served as the comparison. These rejected applicants could still pursue loans from other lenders, but it is unlikely they obtained one due to their marginal creditworthiness. 

    Approved applicants then received loans of about 5,000 to 25,000 pesos, a substantial amount relative to the borrowers’ incomes—for example, the median loan size (10,000 pesos, or USD $220) was 37 percent of the median borrower’s net monthly income. Loan maturity was 13 weeks, with weekly repayments, and with a monthly interest rate of 2.5 percent. Several upfront fees combine with the interest rate to produce an annual percentage rate of over 60 percent.

    Data was collected on business condition, household resources, demographics, assets, household member occupation, consumption, well-being, and political and community participation one to two years after the application process was completed.

     

    Results and Policy Lessons: 

    Impact on Borrowing: Being randomly assigned to receive a loan did increase overall borrowing: the probability of having a loan out in the month prior to the survey increased by 9.4 percentage points in the treatment group relative to comparison. 

    Impact on Business Outcomes: Accepted applicants used credit to shrink their businesses. Treated clients who owned businesses operated 0.1 fewer businesses and employed 0.27 fewer paid employees. One explanation could be that these smaller businesses cost less and are thus more profitable. Perhaps clients would more readily invest in and grow their businesses if loan proceeds are tied to detailed business planning or closer monitoring by the lender. 

    Impact on Risk Management: Evidence suggests that increased access to formal credit complements, rather than crowds-out local and family risk-sharing mechanisms. Treated clients substituted away from formal insurance into informal risk sharing mechanisms: there was a 7.9 percentage point reduction in holding various types of formal insurance, including life, home, fire, property, and car insurance, and treated clients reported increased access to informal sources of credit in an emergency, such as family and friends. In all, these results suggest that microcredit improves the ability of households to manage risk by giving them additional options: using credit instead of insurance or savings, and strengthening family and community risk-sharing. 

    Determinants of Microcredit Delinquency in the Philippines

    Intuition suggests that certain personality types are predisposed to loan default. Accurately identifying these personality types could have profound implications for consumer banking policy, and also important lessons for our understanding of why credit markets may fail. In partnership with the Rural Bank of Mabitac in the Philippines, researchers implemented two experiments and a survey to predict if prospective clients with various personality traits would pay back their loans. The study found that both individuals with higher moral costs and individuals who were the least naïve displayed lower default rates than other groups. The study also found that that survey-based social capital measures are not predictive of loan default for these individual loans, contrary to the results from a prior study with group loans. More general personality index measures were not good predictors of default either.

    Policy Issue:

    In microfinance, lending institutions have come to rely on the knowledge of the group to identify and screen out less trustworthy borrowers.  With more traditional, individual-liability lending programs, institutions rely on credit investigation and the subjective intuition of credit officers to screen clients. While intuition may tell us that certain personality types are predisposed to loan default, there is little evidence to indicate which personality types, if any, are predisposed to not pay back loans. Accurately identifying personality characteristics that make a person more likely to default could have profound implications for consumer banking policy, and also important lessons for our understanding of why credit markets may fail.

    Context of the Evaluation:

    The Rural Bank of Mabitac, the partner in this study, aims to provide sustainable financial assistance to microentrepreneurs in the areas of Laguna and Quezon in the Philippines. The bank, which has over 4,000 microfinance clients, has a very high default rate of 71 percent (default defined as not completing full payment on or before the maturity date of loan).  This study took place from 2005 to 2006 in various locations across the island of Luzon in the Philippines.

    Participants in the study were mostly female clients of a the bank. The vast majority were entrepreneurs, and the most common form of business was corner stores. Most of the participants had secondary or post-secondary education and were relatively wealthy by national standards.

    Details of the Intervention:

    To find out if people with certain personality traits are more likely to default on their loans, researchers collected information about clients’ personalities, then tracked their repayment behavior over a one-year period.  

    The Rural Bank of Mabitac provided researchers with the financial transaction data through one year for all of the subjects involved in the study. Bank staff conducted two experiments and a survey immediately after clients received approval for a new individual loan.

    The first survey was designed to identify subjects with high moral standards. Bank staff interviewed clients and in exchange for a small cash reward. However, when the survey was completed, clients received slightly more than they were owed, leading them to believe the bank made an error. Researchers recorded whether the client returned the excess amount of money while still in the bank, left and then came back to return it, or kept it.

    The second survey was designed to identify subjects who were not able to complete a future task and those who were naïve about the likelihood that they would complete the task. Bank staff administered a short survey to clients to measure their planning capability. Staff asked some clients to either complete the survey on the spot or text back the responses by a pre-specified date in order to receive monetary compensation. Others were told they would receive monetary compensation if they texted the answers back on a pre-specified date.

    Researchers then administered a survey with the social capital questions from the General Social Survey (GSS) on trust, fairness and helpfulness. Finally, they examined the relationship between personality index measures and behavior in financial settings using the Big Five personality index model, which identifies five personality characteristics: openness, conscientiousness, extraversion, agreeableness, and emotional stability.

    Results and Policy Lessons:

    From the first experiment, researchers found that those with “high moral standards” –who voluntarily returned to the bank to return the excess money—were 15 percent less likely to default within the first year of the loan, and if they did default, they defaulted on a smaller amount. 

    In the second experiment, clients who chose to text-back were not more likely to actually text-back relative to those not given the choice, which suggested the presence of subjects with naïvely optimistic beliefs. Rationally aware subjects—those who did not choose the text-back option—were less likely to default relative to the other groups.

    Researchers did not find evidence that survey-based personality index measures were good predictors of loan default. This could be either because default was driven circumstances out of the clients’ controls, and therefore not correlated with personality, or because the index used in this study did not successfully identify the clients’ personality traits.

    From a policy perspective, these experiments suggest that financial institutions could benefit from further exploration of surveys and experiments to provide information on clients’ financial behavior, particularly given the growth of cell phone ownership and the introduction of mobile banking.

    Read about a related project in Peru

    Testing for Peer Screening and Enforcement in Microlending: Evidence from South Africa

    The microcredit model, in which individuals are liable to a group, has been tremendously successful in extending credit to the extreme poor. Yet individuals may also be able to select creditworthy peers and hold them accountable to repay their loans. In South Africa, researchers evaluated whether people have enough information to identify reliable borrowers among their peers and if they can help enforce loan repayment. They found that when given incentives, peers were not effective at screening for creditworthiness, but they were effective at enforcing peer repayment and reducing default.

    Policy Issue:

    Without collateral or credit history, it can be difficult for the poor to gain access to credit through traditional channels, because lenders often impose restrictions on borrowing when they have limited information about a person’s ability to repay a loan. One way that lenders try to reduce the risk of lending to the poor is by using peer intermediation to help identify reliable borrowers and enforce loan repayment. Group lending, where the possibility of future loans for a group of borrowers is contingent on everyone in the group repaying, is one example of this. However, little is known about the channels by which peer networks influence repayment behavior. For example, in group lending models it is not always clear whether peers pressure other members into repaying, or whether they screen out unreliable individuals beforehand to ensure that potential group members are reliable. Peer intermediation may also be effective under individual liability programs, where banks hold individuals rather than groups accountable for repayment. More empirical research is needed to determine whether and how peer mechanisms can help lenders extend credit to the poor.

    Context of the Evaluation:

    Opportunity Finance South Africa, a for-profit micro-lending institution, is among the largest microfinance institutions operating in South Africa with over 3,000 active borrowers. They offer small, high-interest loans with a fixed monthly repayment amount to poor borrowers in Kwazulu Natal province, where nearly 50 percent of people live in poverty and over 30 percent are unemployed. During the time of the study, average loan size was around US$400, and having a documented, steady job was a necessary condition for receiving a loan.

    Details of the Intervention:

    Researchers partnered with Opportunity Finance South Africa to test its Refer-A-Friend program, which offered existing clients the opportunity to receive a bonus for referring a friend who met particular criteria. In order to test whether people have information about the reliability of their peers and can enforce loan repayment, referrers were randomly divided into two groups, each of which received a different set of incentives.

    1.     Screening Incentive Group: Referrers in the first group received a bonus if the person they referred was approved for a loan.  As a result, they had an incentive to screen for candidates who were likely to get approved for a loan based on observable characteristics.

    2.     Screening and Enforcement Incentive Group:Referrers in the second group received a bonus if the person they referred was approved and subsequently repaid the loan on time. They had an incentive to both screen for creditworthiness and encourage repayment.

    The 4,408 existing clients who were given the opportunity to make a referral ended up referring a total of 430 people, of whom 245 were ultimately approved for a loan. Existing clients could earn US$12 for referring someone who was subsequently approved for a loan and/or repaid a loan, while those referred earned US$5 upon approval. 

    Once the referrals were approved, researchers introduced a second stage of randomization, which changed the initial set of incentives that referrers faced. Half of the referrers in Group 1 were offered an additional bonus of US$12 if the person they referred repaid the loan, thus introducing an enforcement incentive with the potential to double their total bonus. Incentives remained unchanged for the other half of Group 1. Among referrers who were originally in Group 2, half received a bonus as soon as their referee’s loan was approved, thus removing the original enforcement incentive. Incentives remained unchanged for the other half of people in Group 2.

    Researchers measured screening and enforcement effects by comparing repayment performance and default rates of loans referred by people facing different incentive structures.

    Results and Policy Lessons:

    Researchers found that referred clients were 32 percentage points more likely to be approved for a loan than drop-in clients, from a base of 23 percent. However, incentives for peer screening did not significantly improve repayment rates, suggesting that, relative to lenders, peers did not necessarily have better information about the creditworthiness of people in their network.   

    Incentives for peer enforcement, on the other hand, did have a significant impact on various measures of repayment performance. The enforcement effect, generated by the incentives that referrers faced after loan approval, significantly improved referees’ loan performance by reducing late repayment, increasing the likelihood that the loan was repaid in full at maturity, lowering the proportion of the principal still owed at maturity, and reducing the number of loans that lenders deemed unrecoverable. On the whole, the enforcement effect reduced default rates by between 9 and 19 percentage points. This suggests that peers can be extremely effective in enforcing repayment, and even small incentives create social pressure that can lead to large reductions in default.  

    This study shows how referral programs offer one way of identifying and isolating the often unobservable effects of peer selection and peer enforcement. Results suggest that peer enforcement can have large effects on individuals’ repayment behavior, while peer selection may only be partly effective at generating information that banks can use to make lending decisions. The research methods employed can serve as guidance for lenders, demonstrating how to build into operations low-cost testing to learn more about using peers to bring in new clients, and reduce risk.

    Related paper citation:

    Bryan, Gharad, Dean Karlan, and Jonathan Zinman.  “Referrals: Peer Screening and Enforcement in a Consumer Credit Field Experiment.” American Economic Journal: Microeconomics, forthcoming (June 2014). 

    Commitment Savings Accounts and Quitting Smoking in the Philippines

    Can financial incentives work to help people quit smoking?  The CARES (Committed Action to Reduce and End Smoking) Program, creates a commitment contract that provides financial incentives for smokers who wish to quit smoking. Smokers offered the product were more likely to be smoke-free 6 and 12 months afterwards.

    Policy Issue: 

    Despite detrimental effects, people throughout the world habitually engage in damaging or inefficient habits such as smoking, eating poorly, or failing to save money. Experts believe that this is because people’s preferences change over time: in the long-run an individual may wish to quit smoking, for example, but in the moment their preference for a cigarette may outweigh their desire to quit. Such behavior, known as time inconsistent preferences, may help to explain why people make inefficient choices that result in poor health or a lack of financial cushioning. Some researchers theorize that habits that have negative long-term effects can be discouraged by giving people commitment devices: contracts which constrain their future behavior, and may exact a financial penalty if they revert to bad habits. 

    Context of the Evaluation: 

    Despite its serious health effects, smoking is extremely commonplace in the Philippines: in 2009, 28.3 percent of Filipinos aged 15 years or older were current smokers, and 22.5 percent smoked on a daily basis. Smoking is also a considerable expense, with the average surveyed smoker spending approximately 100 pesos (US$2) per week on cigarettes, nearly 15 percent of their monthly income. Even though it is a common behavior, 72 percent of survey respondents reported that they wanted to stop smoking at some point in their life, and nearly 45 percent indicated that they had tried to stop smoking within the last year. Survey responses suggest that their lack of success may be due to time inconsistent preferences: though 72 percent reported that they wanted to stop smoking at some point, only about 18 percent of people said that they wanted to stop smoking now. 

    Details of the Intervention: 

    Committed Action to Reduce and End Smoking (“CARES”) is a voluntary commitment savings program. The basic design of the product allows a smoker to deposit a self-selected amount of his own money that will be forfeited unless he passes a biochemical test of smoking cessation. To enroll people in the CARES program, the Green Bank of Caraga identified regular smokers off the street and asked them if they wanted to participate in a short survey on smoking. All subjects received an informational pamphlet on the dangers of smoking, and a tip sheet on how to quit. After completing this baseline survey, subjects were randomly assigned to receive one of four offers:

    1. CARES with deposit collection: A minimum balance of 50 pesos (about US$1) was required to open a CARES account, and individuals were encouraged by marketers to deposit the money they would normally spend on cigarettes into this account each week. This group also received weekly visits from deposit collectors, saving them the weekly trip to the bank. All CARES clients were able to deposit into, but not to withdraw from these accounts, and the accounts yielded no interest, to discourage non-smokers people from using them as a substitute for normal savings accounts. 
    2. CARES without deposit collection: Same as above, except these clients had to go to a bank branch themselves to make deposits.
    3. Cue Cards: These individuals got to choose from among four wallet-sized cards depicting negative health consequences of smoking: premature babies, bad teeth, black lung, or a child hooked up to a respirator. They were encouraged by the marketers to keep them in a prominent location. 
    4. Comparison Group: These individuals received no additional information. 

    Six months after the baseline survey, all survey respondents took a urine test to determine if they were still smoking. Individuals in the CARES treatment groups would receive their entire balance back if they passed the test, but would forfeit it if they failed or refused to take the test. Non-clients (those assigned to the cues and comparison groups) were paid 30 pesos (US$0.60) for taking the six-month test, and all respondents were paid 30 pesos for taking another test 12 months after the baseline. 

    Results and Policy Lessons: 

    In total, about 11 percent of individuals who were offered CARES signed a contract. Individuals who reported wanting to quit, who were optimistic about quitting, and who already exhibited strategic behavior to manage their cravings (i.e. avoiding situations that made them want to smoke) were more likely to sign a contract. On the other hand, individuals who reported wanting to quit more than a year in the future, and who showed signs of being heavy smokers were less likely to sign a contract. Ninety percent of CARES clients opened with the minimum amount of 50 pesos, and 80 percent made additional contributions. The average client contributed about every two weeks, and after six months had a final balance of around 553 pesos, equal to approximately six months’ worth of cigarette spending.

    Individuals who were offered a CARES contract were 3.3 to 5.8 percentage points more likely to pass a urine test for nicotine after six months than those in the comparison group, and were 3.4 to 5.7 percentage points more likely to pass after 12 months—a substantial effect considering that only 8.9 to 14.7 percent of comparison individuals passed the test. This represents an over 35 percent increase in the likelihood of smoking cessation compared to baseline.  However, despite these large treatment effects, a surprisingly large proportion (66 percent) of smokers who voluntarily committed to CARES ended up failing to quit. Still, the results of the CARES program were far above the reductions in smoking associated with the cue card treatment, which had no effect on smoking cessation: though over 99 percent of clients offered the cue cards accepted them, fewer than half remembered the cards and knew where they had put them one year later, and only about 5 percent reported still using them to manage cravings. However, it is still not known how much of the CARES treatment effect was due to the financial commitment that all clients made, and how much was due to the frequent contact that some clients had with deposit collectors. 

     

    Selected Media Coverage:
    Sticking to It - Project Syndicate
     

    Ultra Poor Graduation Pilot in Honduras

    Can an intensive package of support lift the ultra poor out of extreme poverty to a more stable state? Graduation programs provide ultra-poor beneficiaries with a holistic set of services including: consumption support, new livelihoods (such as chickens or goats) provided as an asset transfer along with training on management of the assets, access to savings, and coaching visits over a 24-month period.

    Can an intensive package of support lift the ultra poor out of extreme poverty to a more stable state? Graduation programs provide ultra-poor beneficiaries with a holistic set of services including: consumption support, new livelihoods (such as chickens or goats) provided as an asset transfer along with training on management of the assets, access to savings, and coaching visits over a 24-month period. IPA is conducting randomized evaluations of CGAP and Ford Foundation-sponsored graduation pilots in seven countries: IndiaPakistanHondurasPeruEthiopiaYemen, and Ghana.

     

    Policy Issue:<--break->

    Governments have often attempted to address the needs of the ultra poor by offering consumption support that is costly and offers no clear pathway out of food insecurity. The Graduation Approach, developed by BRAC in Bangladesh, recognizes that the ultra poor face an interrelated set of challenges: lack of skills, assets, and confidence, along with nutritional gaps and health shocks. The graduation approach incorporates a comprehensive package of services designed to ensure that households have the "breathing space" to focus on building new livelihoods, along with a secure place to grow their assets.

    This project is a part of a set of evaluations, in partnership with CGAP and the Ford Foundation, that intends to determine whether the model, pioneered in Bangladesh, is effective in a range of contexts.

    Context:

    As the second poorest country in Central America, Honduras suffers from a disparate distribution of wealth with about 60% of its population living below the poverty line[1]. The economy is centered around exports such as bananas and coffee, crops that are susceptible to weather fluctuations. To aid households struggling to generate income, ODEF and Plan Honduras have joined together to implement the Mejoramiento Integral de la Familia Rural (MIRE).

    Description of Intervention:

    Ultra Poor households earning less than 600 Lempiras (about $30 US) each month are identified with a Participatory Wealth Ranking (PWR) during which villagers rate the economic status of all members of the community. Eligible households are randomly assigned either a treatment or comparison group. Treatment households receive consumption support in the form of a family garden and training in two income generating activities including raising livestock (chicken or pigs) and growing crops (bananas or vegetables) production, or operating a pulperia (small grocery store). Participants are monitored throughout the process. 

    Female heads of households are required to open a savings account at ODEF and are randomly assigned to one of two savings treatments. One savings group is incentivized with savings matching biannually equal to 50% of the average account balance while a second treatment group receives monthly direct savings transfers. Both of these treatment groups receive savings incentives valued at 400 Lempiras (about $20 US).

    By comparing ultra poor households in treatment villages who do not receive the program with those in pure comparison villages, the study is designed to measure spillover effects. IPA is also conducting qualitative research, consisting of interviews on life histories, family dynamics, and cultural traditions, to better understand the mechanisms by which the program functions.

    Results:

    Forthcoming.

    For additional information on the Ultra Poor Graduation Pilots, click here.

    [1]CIA, “World Fact Book” 

    Ultra Poor Graduation Pilot in Peru

    Can an intensive package of support lift the ultra poor out of extreme poverty to a more stable state? Graduation programs provide ultra-poor beneficiaries with a holistic set of services including: consumption support, new livelihoods (such as chickens or goats) provided as an asset transfer along with training on management of the assets, access to savings, and coaching visits over a 24-month period. IPA is conducting randomized evaluations of CGAP and Ford Foundation-sponsored graduation pilots in seven countries: IndiaPakistanHondurasPeruEthiopiaYemen, and Ghana.

    Policy Issue: 

    Governments have often attempted to address the needs of the ultra poor by offering consumption support that is costly and offers no clear pathway out of food insecurity. The Graduation Approach, developed by BRAC in Bangladesh, recognizes that the ultra poor face an interrelated set of challenges: lack of skills, assets, and confidence, along with nutritional gaps and health shocks. The graduation approach incorporates a comprehensive package of services designed to ensure that households have the "breathing space" to focus on building new livelihoods, along with a secure place to grow their assets.

    This project is a part of a set of evaluations, in partnership with CGAP and the Ford Foundation, that intends to determine whether the model, pioneered in Bangladesh, is effective in a range of contexts.

    Context of the Evaluation: 

    The study takes place in rural communities of the Canas and Acomayo provinces in the Department of Cusco, Peru.  To assist ultra poor households with young children in the region, Juntos, a government-run conditional cash transfer program, provides families with a monthly stipend. Arariwa and Plan, the project partners, are implementing the Graduation Model in concert with the Juntos program.

    Details of the Intervention:

    The project team will use a Participatory Wealth Ranking (PWR) to target the ultra poor in the chosen provinces. As overlap is expected between the Ultra Poor Graduation project beneficiaries and Juntos beneficiaries, the project will provide a nine-month cash stipend equivalent to US$35 to those not already receiving it from Juntos.

    This program will then build on the base of the Juntos program by providing all beneficiary households with a productive asset, which over two years, they will be trained to manage. During this time period, beneficiaries will be monitored with weekly visits intended to contribute to the holistic development of the family's economic potential. A microfinance promoter will also encourage beneficiaries to save in group mechanisms. At the end of the two year period, Arariwa will offer microcredit products to the beneficiary families that demonstrate characteristics of reliable clients.

    In total, 80 communities will participate in the study. Three groups will be defined within these communities:

    (A) Treatment households: an average of 20 treatment households will be selected in each of 40 treatment communities.
    (B) Neighbors: an average of 20 comparison households will be selected from each of the same 40 treatment communities, for comparison against their neighbors who received the treatment.
    (C) Comparison households: an average of 20 comparison households will be selected in each of 40 comparison communities.

    The impact of the program can be assessed by comparing groups A and B or by comparing groups A and C. The two comparisons will give different answers if spillover effects are present.

    Results:

    Results forthcoming.

    For additional information on the Ultra Poor Graduation Pilots, click here.

    Impact of Malaria Education on the Health of Microfinance Clients in Benin

    In countries like Benin, where the rural population suffers from poor health, health education is often viewed as a needed compliment to microcredit, as illness can prevent borrowers from repaying their loans. In this study, researchers partner with non-profit Freedom from Hunger and a microfinance institution in Benin to evaluate the impact on health and social outcomes of integrating health education into female only or mixed-gender group microcredit meetings.

    Policy Issue:
    Just as illness can keep a person from working or going to school, it can also cause microfinance recipients to fall back or default on loan payments. In some cases loan defaults are linked to illness, which consumes available cash and makes the victim unable to work. Community organizations and policy makers have therefore proposed including health education alongside microfinance services. As a complement to microfinance services, health education could potentially increase repayment rates for the microfinance institution (MFI), while also improving the lives of clients. Health education increases costs for MFIs, who must direct resources towards training loan officers as educators, and increase the time that loan officers spend at each village banking meeting where training is given. There is potential for benefit on measures of both health and microfinance outcomes, but if the additional trainings are ineffective, they could be drawing away an MFI’s resources away from its core activities.
     
     
    Context of evaluation:
    Located in West Africa, Benin’s economy is based primarily on agriculture and regional trade. The rural population in Benin suffers from very poor health. Although WHO estimates suggest that 20% of children in Benin under the age of 5 sleep under insecticide treated bed nets – a proven defense against malaria contraction -  27% of deaths in children under 5 are nonetheless attributed to malaria.  There are a number of MFIs in Benin, and PADME represents a significant share of the market, serving approximately 44,000 borrowers out of an estimated 140,000 in the entire country.[1]

     
    Description of Intervention:
    In 2006, Freedom from Hunger launched the Microfinance and Health Protection (MAHP) initiative in rural Benin to help local MFI partners create and sustain key health services that complement their credit offering. This evaluation seeks to test the impact of providing credit with education on health and microfinance indicators, as well as the impact of combining education with the provision of health care products, and the specific aspects of the solidarity lending design.
     
    In Benin, researchers will work with PADME to introduce the health education intervention to half of the villages they serve.  PADME typically markets their services by reaching out both to community leaders and individuals who may be interested in taking out loans, which vary in size with an average amount of nearly $1000 US.[2]  In the villages randomly assigned to receive the intervention, clients will be offered access to credit as well as health education.  In the comparison villages, potential clients will only be offered access to credit.  . The health education will consist of three modules: malaria education, integrated management of childhood diseases, and HIV/AIDS planning. An additional component of the study seeks to better understand the role of gender in microfinance.  In addition to the random assignment of health education services, researchers will also designate villages according to the gender composition of new borrowing groups.   In a random subset of villages, microfinance groups will be mixed-gender, while others will be female only.
     
    Results and Policy Lessons:
    Results forthcoming.


    [2] http://www.accion.org/Page.aspx?pid=659

    Commitment Savings Products in the Philippines

    We evaluate a unique "commitment" savings account, in which individuals restrict their right to withdraw funds until they have reached a self-specified goal. Clients are also given the option to automate transfers from a primary account into the commitment savings account, and given the option of buying a lockbox to store their money, with only the bank possessing a key. The account helped people save more after one year, and increased decision making power for women in the household.

     
    Policy Issue: 

    A growing literature on intra-household bargaining finds that increases in female share of income, regardless of any other changes, can provide women with more power within the household. This can lead to an allocation of resources that better reflect preferences of women, including education, housing, and nutrition for children. Many development interventions have thus focused on transferring income as a way of promoting empowerment, and argue that these empowerment mechanisms justify increased attention and financing to microfinance institutions (MFIs), perhaps including subsidies. However, there is little rigorous evidence to confirm that expanding financial access and usage can promote female empowerment.

     
    Context of the Evaluation: 

    Over the past several decades, savings in the Philippines has largely stagnated. In the 1960s, the domestic savings rate was over 20 percent of GDP in the Philippines, making it one of the highest in Asia. At present, the country’s savings rate hovers between 12 and 15 percent – far below the level of savings for most East Asian countries, which ranges from 25 to 30 percent.  Low savings are believed to contribute to the country’s slow economic growth compared to the rest of the region. Past studies have led to a belief that Filipinos are consumption-oriented, with little desire or capacity to save. Filipinos are believed to use credit primarily for daily needs, and bankers report that salary deposits are often withdrawn within the same day. However, there is evidence to suggest poor and low-income Filipinos do save, or at least have the capacity to do so, as informal savings mechanisms appear to be widespread throughout the country.

     
    Details of the Intervention: 

    The Green Bank of Caraga, along with researchers, designed and implemented a commitment savings product called a SEED (Save, Earn, Enjoy Deposits) account. The SEED account provides individuals with a commitment to restrict access to their savings, thus potentially helping with either self-control or family-control issues. Each individual defines either a goal date or amount, and is subsequently unable to withdraw from the account until the goal is reached. Other than providing a possible commitment savings device, no further benefit accrued to individuals with this account: the interest rate paid on the SEED account is identical to the interest paid on a normal savings account (4 percent per annum).

    Researchers trained a team of marketers hired by the partnering bank to visit the homes or businesses of existing bank clients in the commitment-treatment group, to stress the importance of savings to them. This process included eliciting the clients’ motivations for savings, and emphasizing to the client that even small amounts of saving make a difference; marketers then offered them the SEED product. Another group of individuals (the marketing-treatment group) received the exact same marketing script, but was not expressly offered the SEED product. 

    The field experiment sample consists of 1,777 Green Bank clients who have savings accounts in one of two bank branches in the greater Butuan City area, randomly selected for the baseline interview. A second randomization assigned these individuals to three groups: commitment-treatment (T), marketing-treatment (M), and comparison (C) groups. One-half the sample was assigned to T, and a quarter of the sample was assigned to each of groups M and C.

    After one year, a follow-up survey was conducted to assess (1) inventory of assets (to measure whether the impact on savings represented a net increase in savings or merely a crowd-out of other assets); (2) impact on household decision making and savings attitudes; and (3) impact on economic decisions, such as purchase of durable goods, health and consumption.

     
    Results and Policy Lessons: 

    Savings Product Take-up: Twenty eight percent of those who were explicitly offered the SEED product opened an account. After twelve months, about half the clients had deposited money into their account beyond the initial opening deposit, and one third regularly made deposits. It appears that SEED helped about 10 percent of the treatment group to save more.

    Impact on Savings Balances: For the commitment savings group, average savings balance increased by 42 percent after six months and by 82 percent after one year. This increase in savings also does not appear to crowd out savings held outside of the participating bank. 

    Household Decision Making Power: The SEED product leads to more decision making power for women in the household, and likewise an increase in purchases of female-oriented durable goods. The outcome was measured as a decision-making indicator, calculated as the average of responses across nine decision categories (expensive purchases, assistance given to family members, recreational use, etc). Findings indicate that assignment to the treatment group leads to between 0.14 and 0.25 standard deviation increase in a decision making index. 

    Self-Perception of Savings Behavior: Results also indicate that the SEED product leads women who report themselves as favoring present consumption over future consumption in a baseline survey to self-report being a disciplined saver in the follow-up survey. The results here suggest that commitment features, in particular loss of liquidity combined with sole control of the account, are particularly appealing to people with greater self-control and have positive impacts on female decision-making power.

    1  Lavado, Rouselle F., “Effects of Pension Payments on Savings in the Philippines,” International Graduate Student Conference Series, East-West Center. Nov 23, 2006. http://www.eastwestcenter.org/fileadmin/stored/pdfs/IGSCwp023.pdf (Accessed November 4, 2009)

     

    Selected Media Coverage:
    Sticking to It - Project Syndicate
    Rationalizing Resolutions - Business Spectator
     

    Trust and Microfinance in Poor Communities in Peru

    We evaluate a novel microfinance model in which new customers need to gain sponsorship by an existing customer. We investigate how relationships between individuals and social networks impact repayment behaviour. This individual lending program screens clients and enforces good practices much in the same way as more traditional group lending does, but allows microcredit to be extended to those who might not qualify or be interested in a group liability loan.

    See here for a similar study in the Philippines.

    Policy Issue: 

    Microfinance has generated worldwide enthusiasm as a potential catalyst for economic development and poverty reduction. The success of microcredit in providing access to capital without increasing default rates, despite a lack of physical collateral, was originally attributed to the group liability model, in which groups of people are jointly responsible for one another’s loans. However, as the microfinance industry grows and becomes more competitive, institutions must strive to develop new financing methodologies that keep institutional costs low while also extending access to credit. A major problem in microfinance is reaching borrowers who don’t qualify for or are not interested in communal, group liability, banks. Thus, different microfinance structures are needed that reach the poor with individual loans, while still harnessing some of the screening and enforcement benefits of group lending.

    Context of the Evaluation: 

    Since returning to democratic leadership in 1980, Peru has struggled to regain economic stability and growth. Currently, 44% of its 29 million people live in poverty.1 This plight has driven many rural residents to the outskirts of Lima in search of work, where they make their homes in self-built shantytowns that surround the city’s center. These shantytowns now contain a large proportion of Lima's inhabitants, and their residents have limited access to formal financial services such as savings accounts or loans. This study is located in fairly diverse shanty communities in Ancash, just north of Lima. The economy of these communities is primarily based on mining of gold, copper and zinc and fishing.

    Details of the Intervention: 

    In collaboration with PRISMA, a Peruvian NGO offering credit through village banks, researchers designed and implemented a new loan product and administered surveys to 9,000 shantytown households. This program sought to use social connections to screen for responsible clients, outside of the traditional group lending model, by requiring new clients to match up with sponsors who were already bank clients in order to obtain a loan.

    Existing communal bank members acted as a pool of potential sponsors who can cosign small, individual loans for residents of the community who are not already bank members. The sponsor was responsible for repaying a loan if the client defaulted, and thus they were incentivized to cosign with more responsible individuals whom they could easily monitor. Each adult household member in the village received a card, which outlined the rules of the program and included a list of all sponsors in the community as well as a map of the community showing sponsor location. Both spouses of a sponsoring household and a borrowing household had to act as co-signers.

    The two pilot shantytown communities consisted of 282 households with 26 sponsors, and 371 households with 25 sponsors, respectively. Social network surveys conducted in the communities before the implementation of the loan program allowed researchers to map the relationships between clients and sponsors. Researchers measured the strength of connections between individuals by time spent together per week, and whether individuals were considered trustworthy. Interest rates were randomly assigned between 3% and 5% a month across all client-sponsor pairs, in order determine whether the interest rate or the social distance from one’s sponsor had a greater impact on the likelihood of default.

    Results and Policy Lessons: 

    Reporting early results from the two pilot communities, researchers found that close social relationships and geographic closeness between sponsor and client effectively improves trust between agents, reducing the likelihood of default and the risk of cosigning such a loan. Estimates of the relative effectiveness of interest rates and social connections at reducing defaults suggest that lending with a close neighbor reduces the likelihood of default by the same amount as a 3-4 point decrease in the interest rate.

    These findings underscore the prediction on which the program was founded, namely that borrowers with close social relationships to their sponsors allow the bank to be more certain that this new client will repay their loan. Increased information from close social relationships ensures the sponsor, and thus the lender, knows what risk each client represents, and can act to minimize that risk. This individual program therefore effectively screens clients and enforces good practices much in the same way group lending does, and allows microcredit to be extended to those who might not qualify or be interested in a group liability loan.

    1 CIA World Factbook, “Peru,” https://www.cia.gov/library/publications/the-world-factbook/geos/pe.html.

    Returns to Capital and MSE Management Consulting in Ghana

    There are a number of development organizations in Ghana that provide services to micro and small enterprises (MSEs) seeking to expand their operations.  However, as there are few rigorous evaluations of entrepreneurial development programs, IPA is working with local consultants to undertake a rigorous study aimed at understanding the key factors that prevent MSE entrepreneurs from developing and expanding their businesses as well as identifying the value of providing consulting services to them. 
     
    Policy Issue:
    Microenterprises and small enterprises make up a large portion of employment in the developing world. As an alternative to employment in large firms in formal sectors, small enterprises create opportunity for the poor with few resources.  Despite implications for public policy, little is understood about the constraints of these small enterprises. It is unclear which factors prevent small businesses from expanding and employing more workers. This study focuses on two possible constraints, capital and business acumen, in assessing the potential for small business growth.
     
    Context of the Evaluation:
    In Ghana businesses of less than 99 workers (commonly called small or medium enterprises), employ around 66% of the nation’s work force[1].  These businesses are diverse in product offerings, ranging from agricultural produce to crafts to tourism services.  
     
    Ernst and Young, a professional services firm, works in assurance, tax, transaction, advisory services and strategic growth markets.  Around the globe, Ernst and Young works with a range of organizations to provide consulting services, in this case tailors in Ghana. The entrepreneurs participating in the study were diverse: 57% of them were female, they came from 26 different ethnic groups, and spoke 12 different languages at home.  The businesses they operated were in general very small- all had less than 5 employees, and 35% of them had no employees at all.
     
    Description of Intervention:
    IPA partnered with Ernst and Young to offer business consulting services to small businesses in the city of Accra. Out of a group of 157 tailors, 77 were randomly selected to receive one year of free consulting services while the others served as a comparison group.  Four consultants from Ernst and Young met with twenty tailors each between February 2009 and February 2010.  Each tailor received an average of ten hours of consulting over the course of the intervention, with the consultants visiting each tailor two to three times per month. All tailors received thirteen training modules on topics like record keeping, time management, and costing, in addition to individualized mentorship.  After six months, a randomly selected38 tailors who were receiving the consulting and 36 additional tailors in the comparison group were awarded a grant of 200 Ghana Cedi (about $133 US) to invest in their businesses.  Eight rounds of surveys were administered to measure the impact of the consulting services, the cash investment, and the combination of the two.
     
    Results and Policy Lessons:
    Results forthcoming.
     

    [1]Kozak, Marta “Micro, Small, and Medium Enterprises: A Collection of Published Data,” http://rru.worldbank.org/Documents/other/MSMEdatabase/msme_database.htm.

    Providing Business Mentoring to Micro-, Small- and Medium-sized Enterprises (SMEs) in Mexico

    Many public and private programs exist with the goal of helping MSMEs succeed and become more productive and competitive. However, there is little rigorous evidence of the impact of these programs. IPA is collaborating with the Institute for the Competitiveness and Productivity of Puebla (IPPC), an independent state government agency, to evaluate their MSME mentoring program.

    Policy Issue: 

    Microfinance has provided many businesses with access to investment capital, but few microenterprises make the jump to a small or medium size operation, and begin providing jobs for other laborers.  While much of the discussion surrounding access to finance has centered on providing services to microenterprises, SMEs are often seen as the “missing middle” in developing economies.  They are likely too large to be interested in typical microfinance loans, but may be too small to access other sources of capital. SMEs also face competition from larger enterprises, and may lack the management capacity to take advantage of market opportunities.  Addressing the factors that constrain SME growth could have important effects on long-run economic growth and employment.  Many public and private programs already exist with the goal of helping SMEs succeed and become more productive and competitive but little is known about the impact of such mentoring programs on employment generation, firm productivity, and profitability.

    Context of the Evaluation: 

    This study takes place in the state of Puebla, Mexico, which is made up of urban Puebla City and other semi-urban and semi-rural surrounding areas to the east of Mexico City. While Puebla is home to some larger scale industry, a great majority of the economic entities there can be categorized as small and medium enterprises, engaging in small scale manufacturing or the provision of services.

    Details of the Intervention: 

    Researchers collaborated with the Institute for the Competitiveness and Productivity of Puebla (IPPC), a state agency that works with small and medium-sized enterprises to provide training and mentoring services, to identify beneficiaries of the program. The study included 450 owners of small and medium-sized businesses in the Puebla area who showed interest in obtaining mentoring services. Of the 450 sample firms, 150 were randomly selected to receive consulting and mentoring services offered through the IPPC, as well as a subsidy intended to support business operations. Mentors worked with the firms, consulting on a variety of topics relevant to business development.  Though the interactions between mentors and firms was unscripted and varied based on the needs of individual businesses, mentors provided guidance and support with respect to goal planning, business strategy, human resources solutions, and market analysis, in addition to discussing other strategies for how to increase profitability.

    Results: 

    Results forthcoming.

    Examining the Effects of Crop Price Insurance for Farmers in Ghana

    Policy Issue:
    Many small-scale farmers in the developing world face significant income uncertainty, and rural farmers who live from harvest to harvest don’t have much room for error. Variables beyond the farmers’ control, such as fluctuating crop prices, can make a significant difference in how much a family earns for the year.  Farmers may be unwilling to take on additional risks by borrowing and making long-term investments due this uncertainty. This reluctance is thought to contribute to the decision of many farmers not to invest in technologies such as hybrid seeds, fertilizer, or irrigation that could potentially improve crop yields. Many lenders are also extremely wary of extending credit to farmers, fearful that they will inherit the risks inherent to farming. Crop price insurance could help solve this problem, reducing the risk to farmers and providing them with encouragement to make investments in their farms. Lenders, too, may feel more confident in lending to farmers with greater income certainty, facilitating even more capital investments.
     
    Context of the Evaluation:
    In Ghana, 50 percent of the rural population lives in poverty. In the Eastern Region where Mumuadu Rural Bank (MRB) operates, an estimated 70 percent of households make a living in the agricultural sector, but agricultural loans make up only 2 percent of the bank’s loan portfolio. Focus groups with maize and eggplant farmers in the area revealed that farmers were hesitant to borrow for fear that fluctuations in crop prices could force them to default. Rainfall fluctuations, typically an important source of risk for farmers, are not a great concern in this part of Ghana. The prices offered for traded crops, however, do fluctuate greatly. Information gathered in baseline surveys suggested that there was a potential but untapped market for crop price insurance: farmers in the area served by MRB expressed that they would be willing to pay to guarantee a certain minimum crop price. Despite this encouraging baseline finding, banks and insurance providers face the challenge that insurance is not a commonly understood concept among farmers in the region.
     
    Details of Intervention:
    Researchers developed an agricultural loan product in coordination with MRB that had an insurance component that partially indemnified farmers against low crop prices. Specifically, if crop prices at harvest dropped below a set price floor (the 10th percentile of historical prices for eggplant and the 7th percentile for historical maize prices), the bank would forgive 50 percent of the loan and interest payments. Borrowers were not required to pay any premium for the insurance product. The goal of incorporating insurance into the loan product was to reduce farmers’ risk in borrowing to invest in agriculture inputs. The intervention targeted maize and eggplant farmers in particular because the crops are both commonly grown in the region and subject to volatile (but historically well documented) prices.
     
    Standard Mumuadu procedure is to invite farmers to meet in a group with Mumuadu employees to discuss the bank’s financial services, and to encourage farmers to come to a branch to apply for a loan. The average loan size is approximately US$159, which represents a significant change in cash flow for the borrower. For this project, Mumuadu employees approached community leaders to obtain a list of all maize and eggplant farmers in the village. The same community leaders then invited farmers to attend one of the bank’s information sessions. Farmers on the list were randomly assigned to one of four groups, each of which received a variation on the Mumuadu marketing pitch. The four groups were:
    1. Farmers who were offered the standard Mumuadu loan product;
    2. Farmers who were offered the Mumuadu loan product with complimentary crop price insurance;
    3. Farmers who received financial literacy training, before being offered the standard Mumuadu loan product;
    4. Farmers who received financial literacy training, before being offered the Mumuadu loan product with complimentary crop price insurance.
    Prior to the marketing of the loans, Mumuadu employees conducted a survey of the farmers, gathering information relating to their credit history, risk perception, financial management skills, and cognitive ability. An analysis of baseline data, bank administrative data, and a followup survey that focused on farmer investment decisions allowed researchers to draw conclusions on the effect of crop price insurance on borrower behavior and agricultural investment in Ghana.
     
    Results:
    Take up of loans among farmers was quite high, with 86 percent of farmers in the comparison groups choosing to borrow and 92 percent of farmers in the treatment groups taking out a loan.  This high take up across both treatment and control groups made an analysis of the features that predicted take up difficult.  In fact, the researchers found no systematic difference across the treatment and control groups when considering which features predicted borrowing. Overall, those who borrowed tended to be older, with higher scores on tests of cognitive ability.  They were also more likely to have a record of previous borrowing.  
     
    Apart from predictors of borrowing, researchers were interested in whether crop price insurance changed farmers’ investment behavior. There is evidence that it did, but not overwhelmingly. The small sample and high take up across both groups may have played a role in this outcome. Farmers offered the insurance spent 17.9 percentage points more on agricultural chemicals (mostly fertilizer) than those who had not been offered the product. There was also a trend towards growing more eggplants and less maize among these farmers. Farmers offered the insurance were also between 15 and 25 percent more likely to bring their produce to markets rather than sell to brokers who come to pick up the crop. Anecdotally, it is believed that the so-called “farmgate” sellers offer guaranteed purchase contracts, but at lower prices locked in before harvest. Selling in the market, on the other hand, is a potentially more profitable but riskier option.  
     
    There are a number of potential reasons why the researchers did not find large effects of the crop price insurance product on either or take up or investment, and further research in necessary to determine their roles. It is uncertain, for example, whether farmers truly understood the benefits of the insurance. Farmers may also have been reluctant to make long term investments changes before an insurance product demonstrates an established presence in the area. Alternatively, crop price uncertainty may not be as important of an indicator of investment decisions as previously thought. Further research, with a larger sample size, is needed to better understand the roles of risk, financial literacy, and product design in determining microinsurance impact.

    Credit with Health Insurance: Evidence from the Philippines

    The addition of health insurance to microcredit products is increasingly popular; but is it sustainable for microfinance institutions? This study complements other IPA research on hospitalization insurance in the Philippines and should provide important policy lessons on providing public services. We partner with Green Bank to evaluate the impact of providing access to the national health insurance program (PhilHealth) among microfinance clients.  Anecdotal evidence from Green Bank field staff suggests that illness among clients and their families is one of the biggest causes of delinquency.  The PhilHealth program offers an opportunity to reduce clients' vulnerability to unexpected health shocks. 

    Policy Issue:
    Health shocks, such as illness or injury, have the potential to cause significant financial strain for low income households, possibly contributing to late payment or default among microcredit borrowers. Insurance could protect households from health shocks, but is unavailable to many in developing countries. High transaction costs and information problems complicate efforts to offer health insurance in a cost-effective way. There is also potential for moral hazard: once clients become insured, they may be less inclined to care for their health. Adverse selection may also occur, as clients predisposed to sickness may be those most willing to purchase insurance, dampening the profitability of insurers. But research has failed to produce a consensus on the impact of adverse selection and moral hazard for insurers in the developing world. How will these impact the market for health insurance? And how will health insurance impact the lives of microcredit clients?
     
    Context of the Evaluation: 
    The majority of residents in the Visayas and Northern Mindanao regions of the Philippines live in small towns and rural villages. A large for-profit bank, The Green Bank of Caraga, has been a strong presence in these regions for the past decade. The majority of microfinance clients they service engage in small-scale sales or work as tailors, drivers of local transport, and operators of bakeshops and roadside eateries. Anecdotal information suggests that health shocks are a leading cause of default and drop-out among their clients. Most of the respondents in this study reported that their ability work or do related productive activities was restricted at least some of the time.
     
    Details of the Intervention: 
    Researchers worked with the health insurer Philippine Health Insurance Corporation (PhilHealth), which offers the KaSAPI program to help organizations such as microfinance institutions provide affordable health insurance to their members. KaSAPI provided information about the availability and benefits of the insurance to microfinance clients through a marketing campaign. Bank clients were able to use existing savings or loan proceeds to pay for the insurance premium of 300 Philippine Pesos (approximately US$6) per quarter.
     
    Clients were randomly assigned to compulsory insurance, voluntary insurance, or no insurance to serve as a comparison. For clients in the voluntary treatment group, loan officers presented the schedule of PhilHealth benefits and explained that the bank was offering KaSAPI as an optional service for its clients. Premiums were deducted from the loan proceeds. For clients in the compulsory treatment group, loan officers presented PhilHealth materials but also explained that PhilHealth was now a requirement to continue participating in the lending program. Clients’ loans in compulsory PhilHealth treatment group were not released unless they agreed to the premium deduction from their loan proceeds.
     
    End line surveys will establish whether access to health insurance increased risk-taking behavior, if it improved the health status of beneficiaries and if formal insurance crowded out informal insurance arrangements. Evidence will also reveal how health insurance affected institutional outcomes such as profit, client retention, and default.
     
    Results and Policy Lessons:
    Results forthcoming. 

    Marketing Effects in a Consumer Credit Market in South Africa

    The study investigates whether borrowers' choices can be manipulated by frames, cues, and other features that change the presentation of the choice, but not its actual content or inherent value.  IPA partnered with a consumer lender in South Africa to identify which psychological features of a mass-mailing advertising campaign are the most effective. Showing a photo of an attractive woman increased demand for the loan by the same amount as a 25% reduction in the monthly interest rate.

    Policy Issue: 

    Firms in all industries together spend billions of dollars each year advertising consumer products to influence demand, and microfinance institutions are no exception. Economic theories emphasize the informational content of advertising, but advertisers also spend resources trying to persuade consumers with “creative” content and design elements that are not purely informational. Advertising decisions are not inconsequential: decisions about whether to take up loans or savings accounts may be a crucial component of the success of interventions aimed at increasing access to financial services. Although laboratory studies in marketing have shown that “creative” content may affect demand, academic researchers have rarely used field experiments to study advertising content effects. Thus, although attempts to persuade consumers with non-informative advertising are common, little is known about how and how much such advertising influences consumer choice in natural settings like South Africa.   

     
    Context of the Evaluation: 

    Credit Indemnity, the cooperating consumer lender in this study, has operated for over 20 years as one of the largest, most profitable lenders in South Africa. The lender offers small, high-interest, short-term, uncollateralized credit with fixed monthly repayment schedules to the working poor, who generally lack the credit history or collateral wealth needed to borrow from traditional institutional sources such as commercial banks. The available data suggest that borrowers use their loans for a variety of consumption and investment uses, including food, clothing, transportation, education, housing, and paying off other debt.

     
    Details of the Intervention: 

    Working closely with a highly profitable consumer lender in South Africa, researchers sought to determine the effects of advertising content, price, and offer deadlines on loan take up. The lender sent direct mail solicitations to 53,194 predominantly urban former clients offering them a new loan at randomly assigned interest rates ranging from 3.25 percent per month to 11.75 percent per month. These mailers varied in a number of ways. First, there were eight variations in advertising content– (1) a person’s photograph on the letter, (2) a suggestion of how to use the loan, (3) a table featuring either a small or large number of example loans, (4) information about interest rate and payments, (5) a comparison to competitors’ rates, (6) mention of a promotional raffle, (7) a reference to the “special” or “low” rate, and (8) a mention of the lender offering services in the local language. Additional randomization included the time before the offer’s deadline, which varied from two to six weeks.

    About 8.5 percent of clients who received the mailing applied for a loan, of which approximately 4,000 were approved according to the bank’s established criteria. Because the content of the mailer was recorded in their client profile, researchers could determine what kind of advertising scheme was associated with higher demand for loan products.

     
    Results and Policy Lessons: 

    Impact of Advertising Content on Demand: All eight advertising randomizations had significant effects on loan take up, but not on loan amount or default rates. Advertising content effects were large relative to price effects. Showing one loan option instead of four increased demand by the same amount as a 25 percent reduction in the monthly interest rate. Showing a female photo or not suggesting a particular use for the loan also had a similar effect.  These results suggest that seemingly non-informative advertising may play a large role in real consumer decisions.

    Impact of Advertising Channels: Clients demonstrated the strongest responses to the non-price components of loan offers.  They preferred to be presented with fewer example loans, an attractive photo, and to not be told on what they should consider spending their loan. The success of these features suggests that advertising content is more effective when it aims to trigger an intuitive, or quick, effortless response, rather than a deliberative, or conscious, reasoned response.  

    Impact of Deadlines: In contrast with the view that shorter deadlines help overcome limited attention or procrastination, there was little evidence that shorter deadlines increased demand. In fact, demand increased dramatically as deadlines randomly increased from two to six weeks. Even in a competitive market setting with high rates and experienced customers, subtle psychological features appear to be powerful drivers of behavior. 

     
    Selected Media Coverage:

    Commitment Savings Accounts for Remittance Receivers in Mexico

    Policy Issue:

    By the year 2000, individuals living outside their country of birth had grown to nearly 3% of the world’s population, reaching a total 175 million people.[i] The money many of these migrants send home, remittances, is an important but relatively poorly understood type of international financial flow. Currently, the use of savings services is low among many remittance receivers. Increasing savings has the possibility to mitigate the negative impacts of unforeseen circumstances, such as medical emergencies or economic hardship.

    Context of the Evaluation: 

    In Mexico, the financial intermediary Caja Nacional del Sureste (CNS) observed that it was transferring a large amount of remittances to their clients but that very little savings was captured from this flow of money. At the start of the study, only 38 percent of the sample of remittance receivers had a savings account at the Caja, and only about one half of these clients had actually saved any portion of their remittance.

    Details of the Intervention: 

    In an effort to increase savings among remittance receivers, at the onset of the project, CNS offered a saving account called “Tu Futuro Seguro” (TFS), or “Your Secure Future,” to any remittance receivers in its four branches. The account paid 7 percent annually, compounded every month, with no restrictions on withdrawals or deposits. It had no starting fees but required the client to sign a non-binding agreement to save a predetermined amount of money for every remittance received. The client decided that amount, although CNS suggested US$20, US$50, or US$100, The client could also make deposits from any other source of income. As the name suggests, the account was marketed to clients as an account to save for emergencies, future economic shocks, and future illnesses. Though clients could withdraw funds, they were encouraged to only use the money only for an emergency purpose.  

    The total sample of 783 remittance receivers were randomly assigned to either the treatment or the comparison group. For clients assigned to the treatment group, the system automatically informed CNS staff to offer TFS product. During their subsequent visits, CNS staff continued to offer the product until clients opened the account. For those who were assigned to the comparison group, CNS staff followed routine process, and did not offer the TFS product.

    There were two sources of data to inform the study. The baseline survey, which was administered when clients first arrived at the branch, included questions on poverty, children’s attendance in school and information about remittances (who makes decision about remittances, relationship with the sender, and savings level). Administrative data, including account information such as daily transaction amount, monthly balance, basic demographic information, date to join as a member, purpose of the transaction, remittance amounts, committed saving amount, etc, was also collected from the CNS information system.

    Results and Policy Lessons: 

    Take-up of TFS Accounts: Among the 386 remittance beneficiaries who were randomly assigned to receive the TFS offer, 101 (26.17 percent) opened a savings account. Take-up of TFS was higher among those who live below poverty line. Typically, these people were more likely to be female, with fewer years of education and were more likely to speak indigenous language.

    Impact on Savings: The product did not appear to have any significant impact on savings, measured by monthly deposits, monthly withdrawals, and monthly net deposits. 

    The failure to find significant treatment effects may be partly because of the difficulties encountered during implementation. Upon going to the bank to receive one’s remittance, a proportion was supposed to be set aside by default unless the client asks otherwise. However, this is not what happened in reality. Also, the total sample frame was lower than expected, thus lowering the precision of the results. The sample frame was determined by approaching individuals as they came to CNS to receive a remittance, but fewer individuals came forward than was expected in the study intake time period. 

     


    [i]Ashraf, Nava, Diego Aycinena, Claudia Martinez and Dean Yang. “Remittances and the Problem of Control: A Field Experiment Among Migrants from El Salvador,” August 2009.

    Peeling Back the Layers of Group Liability in Bolivia

    Policy Issue:
    Since its inception in the 1970s, the group liability model has been hailed as the innovation that made lending to the poor possible.  Under the group liability model, borrowers take out loans with groups of other borrowers and all group members are  jointly liable for loans extended to others within the same group.  Many microfinance institutions continue to work under this model, yet some practitioners and scholars have begun to question the assumption that the benefits of group liability outweigh the costs. Many contend that group liability not only fails to increase repayment rates but that the policy also locks out those who could potentially benefit from credit access but are unwilling to take responsibility for other people’s loans. It is still unknown whether group liability or self-selection produce better outcomes for microfinance clients and lenders.
     
    Context:
    Despite abundant natural resources, Bolivia remains one of the poorest countries in South America. El Alto, a fast growing suburb of La Paz located in the highlands above the capital, is known for its politically active inhabitants whose protests over the use of natural resources have led to clashes with authorities. Cochabamba, on the other hand, is well known for its agriculture production of grains, coffee, cacao, and coca leaf. Pro Mujer, a prominent microfinance lender in Bolivia, provides loans to female clients in these areas. A majority of these clients engage in commercial activity, very often in local markets or selling goods produced in home-based businesses. Pro Mujer calls their borrowing groups “Communal Associations”, and a typical group has between 18 and 25 members.
     
    Description of Intervention:
    Researchers randomly selected 300 of the sample 400 Communal Associations to test the impacts of various forms of group liability. In these 300 groups, the Communal Associations were divided into sub-groups called “solidarity groups”.  Each solidarity group included 5-7 individual borrowers.  Rather than being responsible for the repayment of all loans in the Association, borrowers in the treatment Associations were only liable for the loans of the members within their solidarity group, effectively reducing the number of loans for which each woman was liable. 
     
    Additionally, treatment groups were randomly allocated to be formed in different ways. In the first sub-treatment group, researchers shifted liability from the Association level to the solidarity group level without changing the self-selected composition of the solidarity groups. In the second sub-treatment, the solidarity groups were rearranged to be composed of borrowers with similarly-sized loans. In the final sub-treatment group, solidarity groups were rearranged and members were assigned to solidarity groups at random.
    Researchers collected data on institutional outcomes important to Pro Mujer, such as repayment rate, loan size, dropout rate, and new member acquisition rate. In addition to analyzing the impact of group liability on borrowers’ behavior, researchers also collected data on how credit officers used their time in order to determine if the new policy had an effect on the efficiency of bank operations.  Loan officers are required to spend much of their time traveling to Communal Association repayment meetings.  If changes to the liability structure improve overall repayment, loan officers may be able to lead meetings and oversee repayment in a more efficient manner, allowing them to take on more borrowing groups.  On the other hand, if the new liability structure worsens repayment, loan officers may end up spending more of their time enforcing repayment, and have less time for other required activities. 
     
    Results and Policy Lessons:
    Due to low compliance, data analysis has been delayed.

    Evaluating Village Savings and Loan Associations in Ghana

    What type of people participate in Village Savings & Loan Programs (VSLAs)? What impact do these programs have on households and communities?

    Policy Issue:

    Although during the last decades microfinance institutions have provided millions of people access to financial services, provision of access in rural areas remains a major challenge. It is costly for microfinance organizations to reach the rural poor, and as a consequence the great majority of them lack any access to formal financial services.  Traditional community methods of saving, such as the rotating savings and credit associations called ROSCAs, can provide an opportunity to save, but they do not allow savers to earn interest on their deposits as a formal account would.  In addition, ROSCAs do not provide a means for borrowing at will because though each member makes a regular deposit to the common fund, only one lottery-selected member is able to keep the proceeds from each meeting.

    Village Savings and Loan Associations (VSLAs) attempt to overcome the difficulties of offering credit to the rural poor by building on a ROSCA model to create groups of people who can pool their savings in order to have a source of lending funds.  Members make savings contributions to the pool, and can also borrow from it.  As a self-sustainable and self-replicating mechanism, VSLAs have the potential to bring access to more remote areas, but the impact of these groups on access to credit, savings and assets, income, food security, consumption education, and empowerment is not yet known. Moreover, it is not known whether VSLAs will be dominated by wealthier community members, simply shifting the ways in which people borrow rather than providing financial access to new populations.

    Context of the Evaluation:

    The Northern region of Ghana is one of the least developed parts of the country.   The majority of its residents make their living in agriculture.  Services including mail delivery, telephone, and medical clinics are very limited in this sparsely populated part of Ghana.

    Description of Intervention:

    In Ghana, researchers are working to measure the dynamics of self-selection with VSLAs.  This study is conducted with 180 communities selected by our partner, CARE, after being identified as villages in which VSLA programs could be initiated.  Ninety villages were randomly selected to receive the VSLA intervention, and the remaining 90 villages are used for comparison.  For those villages randomly assigned to receive the intervention, a CARE representative will enter the village to meet with residents and begin to form VSLAs there.  Interested participants form groups of 15 to 30 community members, pooling their capital to create a fund from which members can borrow.  Members pay back loans with interest, and savings also earn interest, with the rates determined by the group at its founding.  The CARE representatives initiate the formation of new VSLAs, but the eventual goal of the intervention is to provide the community with the capacity to make these groups self-sustaining by providing training on initiation and administration of new VSLAs.

    Three years after full implementation, a follow up survey will allow researchers to understand who chooses to participate in VSLAs in Ghana, as well as how their lives may be affected as a result.  

    Results and Policy Lessons:

    Results Forthcoming.

    We are also working with CARE to evaluate their VSLA programs in Malawi and Uganda.

    Financial Literacy, Short-run Impatience, and the Determinants of Saving and Financial Management in Chile

    Previous research suggests that many people lack the skills needed to calculate expected returns or present discounted values, which may cause them to make suboptimal financial decisions.  Previous work by Hastings and Tejeda-Ashton in Mexico showed that the way that returns to a pension program were presented (in pesos versus as an annual percentage) affected price sensitivity.  Another explanation offered for sub optimal financial decisions is the present bias of many decision makers, who are impatient and consistently choose immediate gratification instead of a more measured approach that allows for optimal saving for future consumption. 

    This project makes use of the biannual Encuesta de Protección Social (Social Protection Survey, EPS), a nationally representative panel survey of 17,000 households, to undertake two experiments that seek to better understand the determinants of saving and financial management decisions. 

    Chile has had a privatized national defined contribution system since 1981, in which participants can select which of five fund managers will handle their retirement accruals. Workers select the fund in which to place their money, and the government provides published statistics on load fees and past returns.  In the first experiment, we will provide information on returns net of fees to individuals in one of these randomly-assigned formats: either expected pension account gains or expected pension account costs over a ten year period, and either presented in Chilean pesos or in Annual Percentage Rates. Participants will view the information and be asked to indicate how they would rank the funds. They will then be given the information sheet to keep.  Using dministrative data in the Chilean pension system, we will track the impact this information has on the fund people choose.

    The second experiment will allow researchers to create a measurement for the participants' ability to delay gratification. We will use this measure to examine how well this ability to forgo current gratification to gain higher returns later explains pension investment decisions, weight and health investments, and propensity to spend on impulse products and carry credit card debt.  At the end of each survey, the participant will be asked to participate in an additional survey that will earn them a git certificate to the largest grocery store chain in Chile. They can choose to do the survey now for a set amount reward, or do the survey within the following month, and upon mailing it back receive a higher credit to the card.  The difference between immediate payment and future payment will be randomized so that the return on waiting ranges from 20 to 60 percent.  Links to both EPS and grocery store data (including store credit cards) will allow us to track future pension and consumption decisions and draw conclusions based on revealed ability to delay gratification.

    Health Education for Microcredit Clients in Peru

    Policy Issue:

    Health and education are areas affected by poverty.  Households with limited resources face barriers affording quality education and seeking access to health information.  As microfinance has become a popular development tool, its services have expanded to address other issues associated with poverty.   Credit with Education is one model that provides microfinance clients with training services. By simultaneously addressing needs for financial services and health information, these programs attempt to create synergistic positive effects on clients and their families.

    Context:

    Peru is a developing country rife with healthcare challenges. According to the World Health Organization, children have a 25% chance of dying before reaching the age of 5[1]. A lack of knowledge about preventable illness like diarrhea and access to immunization contributes to poor health status of vulnerable families.

    PRISMA,  a microfinance institution lending to over 20,000 clients, partnered with IPA to provide microfinance with health education[2].  Freedom from Hunger, an NGO that provides supportive services for the poor, provided guidance to PRISMA in developing an education program based on its worldwide Credit with Education module.

    Description of the Intervention:

    PRISMA village banks were randomly assigned to either a treatment or comparison group. During eight monthly bank meetings, villagers belonging to treatment banks received health education trainings from loan officers, trained by Freedom from Hunger and PRISMA.  The trainings included the following topics focusing on child and maternal health: common childhood illnesses, four danger signals (e.g. diarrhea, cough, fever), medical exams, indicators of quality medical visits, and care for sick children. Surveys administered before and after the trainings collected data on height, weight and hemoglobin ( to measure anemia), days absent from work due to illness, and child nutrition patterns. Institutional outcomes like client retention and repayment rates were also measured.

    Results and Policy Lessons:

    Adults who received the health education training had significantly higher levels of knowledge of module content than those in the comparison group.   There was no impact on health outcomes for children or institutional outcomes.



    [1]World Health Organization, “Peru,” http://www.who.int/countries/per/en/.

    [2]Prisma, “Microfinanzas, ” http://www.prisma.org.pe/#cabecera.

    Group versus Individual Liability for Microfinance Borrowers in the Philippines

    Microcredit has become a popular anti-poverty policy in the last decades. Now with more than 150 million borrowers, microcredit has undoubtedly increased access to formal financial services for the poor.

    Policy Issue:

    Microcredit has become a popular anti-poverty policy in the last decades. Now with more than 150 million borrowers, microcredit has undoubtedly increased access to formal financial services for the poor. An extensive debate exists about the advantages and disadvantages of group liability, where a group of individuals are all responsible for each others’ loans if one member defaults, versus individual liability, where only the borrower is at risk if they default. Group liability may improve repayment rates but it also raises the possibility that bad clients will take advantage of good clients in their liability group.

    While individual liability lending may address some of these issues, it also has potential drawbacks in the form of less intensive screening of members, and higher default rates due to the lack of member responsibility to cover group members’ loans. Additionally, credit officers may spend more time in securing payment or using a more intensive and time-consuming credit investigation and background checks.  

    Context:

    In the Philippines 25% of the population live below the national poverty line[1], and many depend on small and individual enterprise for their livelihood. The islands of Leyte, Cebu, and Bohol, where this study takes place, host a wide range of economic activities, including farming, fishing, manufacturing, and commerce. As is true in much of the Philippines, most of this area has been heavily penetrated by microfinance institutions. Rural banks, cooperatives, and NGOs offer both individual- and group-liability microcredit loans and competition is strong. Most of the lending centers involved in this study are located in small towns or rural villages, though some are located in mid-sized cities. The majority of the members of the Green Bank of Caraga, the sample of this study, are microentrepreneurs engaged in small-scale sales or activities such as tailoring, food processing, and small-scale farming. The average loan size for this sample is US$116), not an insignificant amount when compared against the Philippines GDP per capita of $3,300.[2]

    Description of Intervention:

    Researchers examined two trials conducted by the Green Bank of Caraga to evaluate the effects of group liability relative to individual liability on monitoring and enforcing loans.

    In the first trial, a randomly selected half of the bank’s 169 existing group-lending centers on the island of Leyte were converted to the individual liability model, phased in over time.Researchers could then isolate the impact of group liability on behavior through peer pressure by comparing the repayment behavior of existing clients in group-liability centers and converted individual liability centers. Centers were then assigned to comparison, individual liability or staggered individual liability (the first loan for each member is covered by group liability, but subsequent loans have individual liability). Critical to the design is the fact that individual-liability centers were converted from existing centers, and not newly created. By comparing the repayment behavior of existing clients in group-liability centers and converted centers, researchers were able to isolate the impact of group liability on employing peer pressure to mitigate moral hazard. 

    In the second trial, the sample consisted of 124 randomized communities in areas where the bank was not yet operating. Once feasible villages were identified, an independent survey team conducted a business census, a household roster, and a social network survey. Each of these villages was randomly assigned into one of three treatment groups before the bank established lending centers: liability program, individual-liability program, and group-liability program converted to individual-liability after the first cycle.

    Results:

    After three years, researchers found that individual liability compared to group liability leads to no change in repayment rates (clients in individual liability centers were no more likely to default than their peers in group liability centers) in the short as well as the long term. The removal of joint liability resulted in larger lending groups, hence further outreach and use of credit but the average loan size was smaller, leading to no change in overall group profitability. Loan sizes in converted groups were lower because members were more likely to withdraw savings, lowering their capacity to borrow. Under individual liability, members were also less likely to be forced out of their center, because they could only be removed by credit officers—not peers. Thus, individual liability made existing centers 13.7 percentage points less likely to be dissolved.

    Bank officers in new areas were lesswilling to open groups despite the fact that there had been no increase in defaults. This constrained the growth of the lending program.




    [1] United Nations Human Development Report, “Human Development Indices,” http://hdr.undp.org/en/media/HDI_2008_EN_Tables.pdf (accessed August 25, 2009).

    [2] As of 2008. CIA World Fact Book, “The Philippines,” https://www.cia.gov/library/publications/the-world-factbook/geos/rp.html , (accessed Nov, 20, 2009).

     

    Business Education for Microcredit Clients in Peru

     
    Policy Issue:

    Microfinance has generated worldwide enthusiasm as a potential answer to economic development and poverty reduction. But high default risk and unproductive use of loaned funds plagues many programs. A significant debate exists within the microfinance community as to whether lenders should focus solely on the lending business, or whether they should take advantage of the frequent meetings to integrate various types of training and improve microfinance outcomes. Integrating trainings on health or good business practices with group meetings poses a unique opportunity to deliver these services at minimal cost, but requires clients to spend more time at regular meetings, potentially leading to a higher dropout rate.

     
    Context of the Evaluation: 

    Of Peru’s 29 million people, almost half live in poverty,1 and microfinance institutions (MFIs) hope to improve the socio-economic situation of this population through the promotion of village banking. FINCA Peru, a small, non-profit, but financially sustainable MFI that has been operating in Peru since 1993 creates village banks for poor, female microentrepreneurs, giving them access to formal financial services. Their clients are relatively young, have little formal education and often have families to support. All clients have microenterprises, which may include selling food or handicrafts, or small scale agriculture. FINCA clients each hold, on average, $233 in savings and their average loan is US$203, with a recovery rate of 99%.

     
    Details of the Intervention:

    Researchers worked with FINCA in Ica and Ayacucho, Peru to measure the marginal impact of adding business training to a group lending program. FINCA sponsored 273 village banks with a total of 6,429 clients, most of whom were women. These banks were divided into treatment groups and comparison groups, with 104 mandatorily participating, 34 voluntarily participating, and 101 as the comparison.

    Individuals who held accounts at treatment banks received 22 entrepreneurship training sessions and materials during their normal weekly or monthly banking meeting. Training materials were developed through a collaborative effort between FINCA, Atinchik and Freedom from Hunger and had been used in past projects. Sessions included exercises and discussion with the clients, and a lecture which aimed to improve basic business practices such as how to treat clients, how to use profits, where to sell, and the use of special discounts and credit sales. For example, in one lesson the trainers had each microentrepreneur write out a budget for their enterprise. Comparison groups remained as they were before, meeting with the same frequency to make loan and savings payments. Data was collected on dropout rates, repayment rates, loan size, savings, business size and income to asses the impact of the training.

     
    Results and Policy Lessons:

    Impact on Business Practices: There was weak evidence that the training may have helped clients identify strategies to increase sales and reduce downward fluctuations: for clients in the treatment group, sales in the month prior to the follow up surveys were 15 percent higher than in the comparison group, and returns were an average 26 percent higher in "bad months" when they would have expected downward fluctuations in their sales. Clients who received business training were significantly more likely to keep records of their account withdrawals, and had better knowledge about business and how to use profits for business growth and innovation. Interestingly, there were actually larger effects for those individuals that expressed less interest in training at the outset of the program. This result implies that demand-driven market solutions may not be as simple as charging for the cost of the services. It is possible that after a free trial, clients with low prior demand would subsequently appreciate its value and demand the service.

    Impact on Business Outcomes: This study found little or no evidence of changes in key business outcomes such as business revenue, profits or employment.. For example, the business training had no effect on the number of workers employed at family businesses, did not change the profit margin of the most common products sold at retail businesses, did not increase the number of sales locations, and did not induce entrepreneurs to start new businesses. 

    Impact on Institutional Outcomes: Business trainings had effects on some institutional outcomes such as client retention, but not on others such as loan size or accumulated savings. Perfect repayment among treatment groups was three percentage points higher than among comparison groups. Treatment group clients were four percentage points less likely to drop out of the program (either permanently or temporarily) than were comparison group clients, although the proportion of client dropout still remained high in the treatment group, where 59 percent of clients left their banks at some point during the intervention, compared to 63 percent in the comparison group. The training is costly to run, as it requires labor costs for the organization to train their staff and acquire materials. This constituted a 10 percent increase in FINCA’s costs. However, the improved client retention rate generated significantly more increased net revenue than the marginal cost of providing the training, and so all in all providing business trainings was still a profitable undertaking for FINCA.

    1 CIA World Factbook, “Peru,” https://www.cia.gov/library/publications/the-world-factbook/geos/pe.html.

     
    Selected Media Coverage:

    Evaluating the Saving for Change Program in Mali

    While informal savings groups are common around the developing world, their formats can limit flexibility in responding to members’ needs, particularly when it comes to loans or coping with unexpected expenses. In Mali, Oxfam’s Saving for Change (SfC) program allows groups of women to form a savings group together. Members can also apply for loans from the group, to be paid back with interest. When the group ends, the pool of funds with the loan interest is redistributed to the members. In 200 villages in the Segou region where SfC was implemented, women were 5 percent more likely to be part of a savings group, and savings were 31 percent higher than in the 300 comparison villages without the program. Households in those villages experienced better food security, and had more livestock, but there were no significant differences observed in a number of other economic and social well-being outcomes.
     
    Policy Issue:
    Community-based methods of saving, such as Revolving Savings and Credit Associations (ROSCAs), can offer informal savings and credit options where access to formal financial services is limited. Under this system, a group of individuals meet regularly to contribute to a fund that is then given as a lump sum to a different member at each meeting. However, ROSCAs can be an inflexible means of borrowing since the pool of funds is fixed and is given to only one member at a time, often by lottery. As such, members cannot necessarily rely on ROSCA payouts to cover unexpected expenses, such as those due to illness or natural disasters. One way to overcome these challenges may be to encourage savings and credit groups to adopt flexible rules that cater better to the needs of their members. Additional research is needed to understand how to better organize ROSCAs and whether they enable participants, especially the poorest, to save and borrow more.
     
    Context of the Evaluation:
    The Saving for Change (SfC) program began in Mali in 2005 to assist women in organizing themselves into simple savings and credit groups. The program is meant to address the needs of those who are not reached by formal financial service providers or traditional ROSCAs. As part of the program, about twenty women voluntarily form a group that elects officers, establishes rules, and meets weekly to collect savings from each member. At meetings, each woman deposits a previously determined amount into a communal pool, which grows in aggregate size each time the group meets. When a member needs a loan, she asks the group for the desired amount; the group then collectively discusses whether, how, and to whom to disperse the funds. Loans must be repaid with interest, at a rate set by the members, and the interest collected is also added to the communal pool of funds. Saving for Change introduced a novel oral accounting system which helps the women manage each woman’s debts and savings totals.
     
    At a predetermined date, the group divides the entire pool among members in proportion to their savings contributions. The timing can coincide with times of high expenditure, such as festivals or the planting season. The interest from the loans generally gives each member a return on her savings of approximately 30 percent, annually. The group can then start a new cycle and establish new rules.  Groups sometimes opt to increase their weekly contributions, accept new members, or select new leaders.
     
    Unlike formal lenders, SfC group members lend their own money, so collateral is not required. The fact that all money originates from the women themselves, as opposed to outside loans or savings-matching programs, also increases the incentives to manage this money well. In addition, the program is designed to be self-replicating through “replicating agents” in each village.Once the first group is established in an area, members themselves become trainers and set up new groups in their village and the surrounding area.  
     
    Prior to the study, approximately 22 percent of women in the sample area were members of ROSCAs and over 40 percent of households had experienced a large, unexpected fluctuation in income or expenditure during the last 12 months.
     
    Details of the Intervention:
    In order to test the impact of the SfC program as well as different strategies for encouraging replication, researchers randomly selected 500 villages in the Segou region of Mali  to participate in the study. These villages were randomly divided into two treatment groups of about 100 villages each, and one comparison group with nearly 300 villages. The first treatment group received the SfC program with a structured, three-day training for replicators who received a handbook on how to start and manage savings groups. The second treatment group received the SfC program with an informal, organic training program in which trainers answered questions but did not provide any formal instruction to replicators. The comparison group did not receive the SfC program.
     
    Results and Policy Lessons:
    Adoption of SfC: Nearly 30 percent of women in treatment villages joined a savings group as part of the SfC program. Those women who chose to participate in the SfC program were, on average, older, more socially connected, and wealthier than non-members. Take-up was higher in villages that received the structured training program than in those that received the informal training.
     
    Savings and Loans: Women in treatment villages were 5 percentage points more likely to be part of a savings group, and average savings in treatment villages increased by US$3.65 or 31 percent relative to the comparison villages. The SfC program also significantly increased women’s access to credit. Women in the treatment villages were 3 percentage points more likely to have received a loan in the past 12 months, and this loan was more likely to have come from a savings group rather than from family and friends.
     
    Resilience to income shocks: Households in the villages receiving SfC were 10 percent less likely to be chronically food insecure than those in control villages. In addition livestock holdings increased, and households in treatment villages owned on average US$120 more in livestock than those in comparison villages, a 13 percent increase. In Mali, owning livestock is a preferred way to store wealth and mitigate against risks such as drought or illness.
     
    Structured vs. Organic Replication: Villages that received structured replication training rather than informal training had higher participation rates in SfC. In addition, households in those villages were less likely to report not having enough food to eat and more likely to report owning assets such as livestock. Even though the structured training program was slightly more expensive to implement, it delivered greater benefits to villages assigned to that version of the SfC treatment.
     
    Researchers did not find any significant effects of the program on health outcomes, school enrollment, investment in small businesses or agriculture, or women’s empowerment. 

    Impact of Rural Credit in Peru

    Few studies have rigorously quantified the impacts of microcredit loans or determined the sensitivity of borrowers to interest rate pricing. In cooperation with the Peruvian microfinance institution ARARIWA, IPA is investigating the impact of microloans on the whole as well as determining the demand curve for microcredit.

    For the study, areas in Cuzco are divided into one of three groups: a control group with no access to credit during the 24 months of the study, a treatment group that will receive credit offers at a lower interest rate, and treatment group that will receive credit offers at a higher interest rate. Data is being collected to analyze the take-up of microcredit loans, changes in socioeconomic levels, and borrower sensitivity of interest rates.

    Dean Karlan

    Deposit Collectors in the Philippines

     

    Policy Issue: 

    In the last three decades, microfinance has generated worldwide enthusiasm as an innovation in anti-poverty policy by bringing formal financial services to the poor. But relatively little is known about the asset side of microfinance services – microsavings. Deposit-collection services, regular pickup of cash with unrestricted rights to withdraw it later, are a popular tool among both microfinance lenders and clients across the globe. Savings programs provide banks with a mechanism to learn more about potential lending clients, and for clients, the reward of a future loan may be incentive enough to encourage them to save regularly via the service. A high demand for formal savings mechanisms also implies that in-home solutions, such as hiding money in a mattress, are not satisfactory to people. But, it is yet unclear whether deposit-collection services will actually be utilized to generate higher savings rates than the status quo. 

     

    Context of the Evaluation: 

    Over the past several decades, savings in the Philippines has largely stagnated. In the 1960s, domestic savings rate was over 20 percent of GDP, making it one of the highest in Asia. At present, the country's savings rate hovers between 12 and 15 percent - far below the level of savings for most East Asian countries, which ranges from 25 to 30 percent. However, there is evidence that poor and low-income Filipinos do save, or at least have the capacity to do so, and informal savings mechanisms appear to be widespread throughout the country. In an effort to provide formal savings options to their microfinance clients, the well-established Green Bank of Caraga developed a deposit collection service. Sampled bank clients represent a wide cross-section of the Philippines, including individuals from broad economic and educational backgrounds.

     
    Details of the Intervention: 

    Researchers evaluated the impact on savings balances and borrowing behavior from a deposit-collecting program offered by the Green Bank of Caraga. To gain insight into the mechanisms that might cause increases in savings rates, and the type of individuals who demand this specialized savings service, researchers investigated the determinants of take-up.

    Green Bank first identified ten barangays (small political and community units) that were reasonably accessible and had a significant enough number of existing clients to warrant sending an employee into the area. These barangays were located around Butuan City in northern Mindanao, where the head office of the Green Bank is located. Green Bank marketing representatives were able to reach 137 existing clients' homes in five randomly selected treatment barangays. A door-to-door deposit-collector service was offered, which would collect funds to be deposited at the local bank. The cost of the service was 4 pesos per pickup, and clients could choose either a monthly or bi-weekly pickup schedule. If clients chose to participate, they committed to pay for the pick-up service regardless of whether they submitted a deposit, although this was not always enforced. The remaining five barangays were offered no collection services, serving as the comparison. In both treatment and control barangays, clients could withdraw their funds at any time. 

     

    Results and Policy Lessons: 

    Take-Up Determinants: Distance to the bank branch, a measure of the transaction cost that a client incurs by depositing money normally, was a strong determinant of take-up. Each additional 10 kilometers a client had to travel to make a deposit increased the probability that they would enroll in the deposit collection service by 6 percentage points. Additionally, married women were more likely to take up the service relative to single women - being married increased the probability that a woman would take-up the service by about 13 percent. However, married men were no more likely than single men to take up the service. The gender difference suggests that intra-household decision making factors play a strong role in the take-up of deposit-collection services.

    Impact on Take-Up: The deposit-collection service resulted in a substantial increase in savings for those offered the service. Of the 137 clients offered the service, 28 percent took up the deposit collection. Of those 38 individuals, 35 chose monthly service, though 18 never deposited money through the collectors during the 10-month study period. Despite the wide variance in the impact on savings of the deposit-collection, on average, the impact was positive relative to savings changes of clients in the comparison barangays. The deposit-collection service increased savings by about 25 percent after 10 months. The average person made 3.85 deposits over the 10 month period, and the average deposit amounted to 497 pesos. Overall, after 10 months treatment clients saved 228 pesos more than the comparison. These results could be attributed to decreased transaction costs, facilitating follow through on financial planning and providing a public commitment device for limiting spending, among other explanations. Further, there was a slight decrease in borrowing for those clients offered the deposit-collection service, possibly due to the increase in assets. 

    1 Lavado, Rouselle F., "Effects of Pension Payments on Savings in the Philippines," International Graduate Student Conference Series, East-West Center. Nov 23, 2006. http://www.eastwestcenter.org/fileadmin/stored/pdfs/IGSCwp023.pdf (Accessed November 4, 2009)

    The Psychology of Debt: An Experiment in the Philippines

    Policy Issue:

    In many developing countries it is common for street vendors or small-scale entrepreneurs to borrow small amounts of money for their working capital at very high rates of interest.  Over time, these interest rate payments can amount to a burdensome proportion of a vendor’s take-home profit. But if vendors saved small amounts of money over time, they may be able to build up a buffer of savings large enough to stop the practice of borrowing money from informal lenders. It is unclear, though, whether vendors may persist in borrowing due to lack of information about the benefits of saving and whether a financial literacy invention could benefit these entrepreneurs.

    Context:

    In urban markets in the Philippines, like the large covered market in Cayagan do Oro, street vendors are prevalent and often borrow from informal moneylenders at high rates of interest. Vendors in this study all ran their own businesses, had a history of indebtedness at interest rates of at least 5% per month over the previous 5 years, and had an outstanding debt of less than 5,000 pesos (US$100). Vendors were included in the study only if they met these conditions and operated a business in or near the public market in Cagayan de Oro.  Vendors most often used their loans to expand or maintain their current businesses.

    Description of Intervention:

    Researchers tested two interventions to help break the cycle of debt. After an initial baseline survey to gather information on history of debt, household consumption and financial literacy, 250 vendors were randomly assigned to one of four groups. They either (1) had their outstanding debt paid off, (2) were given financial literacy training, (3) received both, or (4) received nothing (comparison).

    For the debt payoff intervention, researchers gave respondents money equal to their previously reported debt and had them payoff their outstanding balances (an average of about $47). For the financial literacy intervention, researchers developed a script modeled after Freedom from Hunger’s financial literacy module. Partner staff conducted a single financial literacy session with respondents in small groups of about 16 people that focused on the benefits of savings, the long-term costs of repeated borrowing from moneylenders, the value of planning in advance and saving for large expenses, and the advantages of borrowing from formal lenders (like microfinance institutions or banks) at lower interest rates.

    A set of follow-up surveys were administered after 1 month, 2 months and 3 months and an endline survey was administered between 19 and 21 months after the baseline survey.  The baseline survey was administered in early July 2007 and the endline survey was administered between February and April 2009.

    Results:

    Results forthcoming. A follow-up study is being conducted to replicate the results, expand the sample, and assess the impact of adding a savings component to the debt forgiveness intervention. This component consists of offering a savings account with no starting fees and initial deposits subsidized by IPA.

    See here for a similar study in Chennai, India.

    Savings Account Labeling for Susu Customers in Ghana

    IPA is working with Mumuadu Rural Bank (MRB) to study the response to and impact of a new account labeling savings product. Working with Susu customers and Susu agents, the study compares the success of this new product with the current Susu savings product. The new savings product has only a psychological difference: it allows the labeling of funds within an account so that deposits can be directed to a specific goal, such as health, education or business savings.
     
     
    Policy Issue:
    Saving is hard for most people, rich or poor, educated or not. Setting aside even small sums of money on a regular basis requires a conscious trade-off between buying something now in favor of achieving long-term goals, and even the most prosperous struggle to translate this intention into sustained savings. Saving may be especially difficult for poor individuals, as daily needs and family obligations may distract attention from meeting savings goals.
     
    Poor individuals not only have less income, but often face additional barriers to savings. They tend to be the least educated about their financial options, have the least access to secure financial institutions and are the least able to afford financial mistakes. Due to a variety of challenges, savings rates are quite low across the developing world and individuals often go into debt to maintain family well-being.
     
    Context of the Evaluation:
    Ghana's Eastern Region has a vibrant microfinance sector populated by a wide range of formal and informal institutions, and uniquely characterized by a prevalence of "Susu" collectors: traditional savings collectors who walk a daily path through town to collect Susu, "small small moneys", from their customers. Typically, Susu collectors return the funds to their customers at the end of the month in exchange for one day’s worth of collections.
     
    As banks moved into rural areas, they have formalized Susu collection, paying their agents on commission and not charging their customers a direct fee for the service. Competition between banks is highly visible in the urban marketplaces where Susu agents, clothed in the bright batiks of their respective institutions, fight for the patronage of the same group customers.
     
    Description of Intervention:
    Researchers collaborated with Mumuadu Rural Bank (MRB) in the Eastern Region of Ghana to test the impact of a new type of savings account aiming to help clients save by focusing attention on savings goals. The evaluation seeks to understand if a purely psychological savings product, which encourages customers to earmark account funds for a specific financial goal, increases savings rates.
     
    Study participants were active savings customers of Susu agents at Mumuadu Rural Bank in five urban and rural communities across Eastern Region in Ghana. Among them, half were randomly selected to receive an offer of the labeled savings account, while the remaining customers continued to access existing savings services from the bank. The new labeled account shared all the characteristics of the regular Susu account with the addition that customers could “label” funds for particular expenditures, such as buying a house or paying children’s school fees. After labeling the account, customers stated how much they planned to save over the next six-month period. The bank provided each customer with a free passbook that had the personal savings goal written on the front as a reminder.
     
    Mumuadu Rural Bank staff were responsible for maintaining the accounts once they had been opened and Susu agents continued their normal rounds, collecting funds for the labeled account alongside the regular Susu savings accounts. Researchers tracked the take-up of the new product and savings activity over six-months among all participating customers.
     
    Preliminary Results:
    Preliminary results found that customers with a labeled Susu savings account show a 31.2 percent increase in total deposits after nine months of account operations as compared to Susu customers without the labeled account. This increase is statistically significant across the five study branches, though the effect size varied in each community.
     
    Over the study period, withdrawals by customers with the labeled account were not significantly higher than customers without the labeled account, indicating that these funds provided a stable source of additional capital for Mumuadu Rural Bank. While customers with labeled accounts showed greater savings rates, there was no difference in their expenditure patterns from regular Susu customers.
     
    Additional data is currently being collected and analyzed to determine if these impacts are sustained and if there are identifiable trends in the timing of deposits and withdrawals.

    Interest Rate Sensitivity Among Village Banking Clients in Mexico

     
    See the full results in an executive summary here and the full paper here (PDFs).
     
    Policy Issue: 

    Microcredit is the most visible innovation in anti-poverty policy in the last half-century, and in three decades it has grown dramatically. Now with more than 150 million borrowers, microcredit has undoubtedly been successful in bringing formal financial services to the poor. This practice has sparked a debate surrounding the question of “fair interest rates,” particularly given the extreme poverty of many microfinance clients. The arguments in defense of higher rates range from the belief that they are necessary in order to cover the high costs of lending, to access is more important than price and as more institutions enter the market, rates will drop. But these arguments remain untested, and the question of a “fair rate” remains unanswered.  The debate has intensified as investors look to the potential profitability of microfinance.  In 2007, Compartamos Banco, the largest microfinance institution in Latin America, held a successful IPO.  While the bank’s leadership defended the decision as a way to raise capital and provide credit to even more clients and investors including non-profit Acción International reaped the benefits, critics accused the bank of profiting at the expense of the poor.   

    Context of the Evaluation: 

    In 1990, Compartamos Banco began offering credit to women in Southern Mexico in an effort to promote economic development through spurring the growth of micro-businesses. Today, the organization has branches in every state in the Mexican Republic, and has over a million borrowers.  The bank requires all borrowers to have an existing business or plans to start one with the loan proceeds.  There are many microfinance providers in Mexico, and Compartamos loans are neither the cheapest nor most expensive.  

    This study was undertaken in Compartamos branches throughout the country, representing a diverse population living in urban, periurban, and rural locations. The target population, comprised mostly of small-scale merchants who sell handicrafts or food products, also includes owners of more established businesses such as hair salons or restaurants, and people involved in agricultural activities. 

    Details of the Intervention: 

    Researchers sought to observe Compartamos borrowers’ reactions to varying interest rates, in order to determine the impact of loan cost on take-up and borrower behavior.  The study focused on the bank’s most popular product, a group liability loan offered exclusively to woman called Crédito Mujer. In order to borrow, clients must be women, 18 years of age or older and either currently be engaged in an income generating activity or plan to start one once given the loan.  

    As part of the implementation of a new pricing model, Compartamos lowered the interest rates on the Crédito Mujer product for almost all clients.  At treatment branches, they lowered the rates further.  Under normal operations, each branch offers three rates – bronze, silver, or gold – which are assigned to borrowing groups based on the Compartamos pricing model.  Compartamos lowered the interest rates offered at treatment branches so that borrowers at those branches received a flat monthly rate that was .5% less than the same borrowers would have received at comparison branches  For example, a "bronze" borrowing group at a treatment branch received a rate that was .5% less than a "bronze" borrowing group at a comparison branch. 

    Results and Policy Lessons: 

    The results show that branches offering the lower interest rate scenario had more clients, more new clients and larger loan portfolios. The change in cost of borrowing, however, did not attract a different borrower profile.  The new borrowers at treatment branches were not poorer or less educated than existing clients.  The effect of lower interest rates on the financial sustainability of an MFI is also a crucial question.  Attracting more clients may at first glance appear a wholly positive outcome, but its effect on profitability is not obvious.  While adding several group members to an existing borrowing group increases income without increasing costs (because the same loan officer can service these loans in the same meeting), adding new groups may require hiring more personnel or even opening an expansion branch office.  Still, though these new clients resulted in higher costs in some cases, the overall effect on net profits was positive.

    These findings suggest that MFIs that choose to lower rates can both attract and retain more clients, who in turn borrow greater amounts. This has implications for MFIs that are looking to improve their outreach, and can result in more people gaining access to credit and making use of it. And, achieving these goals can also be profitable, in contrast to the arguments put forth by some defenders of high interest rates. 

     

    Interest Rates and Consumer Credit in South Africa

    How sensitive are borrowers to higher interest rates? We worked with a South African lender to randomize both the interest rate offered to clients by a direct mail solicitation, and the maturity of an example loan shown on the offer letter.

    Policy Issue:

    In 2001, more than one billion people were living in extreme poverty, subsisting on less than $1 a day.1 Microcredit can help to alleviate poverty by expanding access to credit, providing the capital necessary to invest in higher education, smooth consumption or start a business. But providing small loans to risky clients in poor settings often yields small profits for lenders, and many microfinance institutions (MFIs) rely on subsidies to stay afloat. Policymakers often call on MFIs to increase interest rates in order to increase profits and eliminate their reliance on subsidies. This strategy makes sense if the poor are not sensitive to higher interest rates; microlenders could increase profitability and achieve sustainability without reducing the poor’s access to credit. Yet existing research offers little evidence on interest rate sensitivities in target markets, and little guidance on how MFIs can derive optimal rates.

    Context of the Evaluation: 

    Cash loan borrowers are prevalent in South Africa. Estimates of the proportion of working-age population currently borrowing in the cash loan market range from below 5% to around 10% and the borrowed funds account for about 11% of aggregate annual income. The for-profit South African lender who collaborated for this study is one bank who provides cash loans in this high-risk consumer loan market. Clients typically use loans for a range of consumption smoothing and investment purposes, including food, clothing, transport, education, housing, and paying off other debt. Cash loan sizes tend to be small relative to the fixed costs of underwriting and monitoring them, but substantial relative to a typical borrower’s income. For example, the lender’s median loan size of approximately US$150 is 32% of its median borrower’s gross monthly income. This lender typically offers “medium-maturity,” 4-month loans, with a 7.75 to 11.75% interest rate per month. Repeat borrowers have default rates of about 15%, and first-time borrowers default twice as often.

    Details of the Intervention:

    Researchers test the assumption that borrowers are not sensitive to higher interest rates by working with this South African lender to randomize both the interest rate offered to past clients on a direct mail solicitation, and the maturity of an example loan shown on the offer letter.

    First the lender randomized the interest rate offered in “pre-qualified,” limited-time offers that were mailed to approximately 58,000 former clients with good repayment histories. Most of the offers were at relatively low rates. Clients eligible for maturities longer than four months also received a randomized example of either a four-, six- or twelve-month loan. Clients who wished to borrow at the offer rate then went to a branch to apply, through the standard bank procedure.

    These clients were from 86 predominantly urban branches and had borrowed from the lender within the past 24 months. They were in good standing, and did not currently have a loan from the lender as of thirty days prior to the mailer. Each mailer contained a deadline, ranging from two to six weeks, by which the client had to respond in order to be eligible for the offer rate. At that time, loan applications were taken and assessed as per the lender’s standard underwriting, and 3,887 individuals were approved for a loan.

    Results and Policy Lessons:

    Price Elasticities: Results reveal demand curves with respect to price that were gently downward sloping throughout a wide range of rates below the lender’s standard ones. But demand sensitivity roses sharply at prices above the Lender’s standard rates. A price decrease from the maximum 11.75% to the minimum 3.25% rate only increased take-up by 2.6 percentage points. However, high rates reduced the number of applicants significantly; clients randomly assigned a higher-than-standard offer were 36% less likely to apply than their lower-rate counterparts. Higher rates also reduced repayment. Thus, an interest rate increase would be unprofitable for this lender. It would produce both a reduction in demand and increased default rates, which would not be compensated by the increase in interest revenue from higher rates.

    Maturity Elasticities: The example maturity date on the loan letter powerfully predicted the actual maturity date chosen by the borrower. For each additional month of maturity suggested, the actual maturity date chosen was pushed out by 0.11 months. Researchers also found that each month of additional time to maturity increased loan demand by 15.7%. Most notably, the maturity effect was large relative to price sensitivity. Loan size did not respond to price in the maturity-suggestion sample, but was very responsive to loan maturity. On average, a one month maturity increase had approximately the same effect as a 436 basis point interest rate decrease.

    Taken together, this evidence suggests a practical implication that some MFIs should consider using varied maturity dates rather than price to balance profitability and targeting goals.

    1United Nation Secretary General Millennium Project, “Fast Facts – The Faces of Poverty,”http://www.unmillenniumproject.org/documents/UNMP-FastFacts-E.pdf. (Accessed September 18, 2009)

    Psychological Responses to Microfinance Loan Recovery Strategies in Peru

    Microfinance clients are usually too poor to offer any property as collateral, so micro-lenders use alternative methods to encourage repayment. The most common methods are: (1) threatening to not offer loans in the future to clients who default and (2) using peer pressure mechanisms to ensure that borrowers repay. 

    We have partnered with PRISMA to identify ways to implement these methods more effectively. PRISMA has recently deployed a new strategy in its individual loan program for loan recovery that involves sending written notifications to defaulters. This strategy makes use of both the promise that good payers can receive additional loans from PRISMA in the future and the pressure that loan recipients face from their loan guarantors.

    Details of the Intervention:

    In the study, clients are randomly assigned to two groups. Two thirds of the clients receive written notifications if they fall in default (treatment group), while the rest of the clients do not receive any additional written notifications (control group). Within the treatment group, clients receive letters with either "gain" or "loss" frames, telling the client either that rectifying his credit standing will allow him access to credit in the future or telling him that his continued default will keep him from accessing loans in the future and threatening legal action. Additionally, in some cases both the sponsor and the client receive a letter, while in other cases only the client does.

    Results:

    The study followed PRISMA´s loan clients from March 2006 to January 2008. We found that letters significantly reduce default rates and are most effective when messages with a loss frame are sent to both clients and their guarantors.

    Small Consumer Loans for the Working Poor in South Africa

    Expanding access to business credit is a goal shared by microfinance practitioners, policymakers, and donors alike. However, there is less of a consensus when it comes to expanding access to consumer credit. Even as microfinance institutions increasingly move beyond entrepreneurial credit and offer consumer loans, practitioners and policymakers continue to voice their concern for “unproductive” lending. This study seeks to address these concerns by examining the impact of a consumer credit supply expansion.

    We found significant and positive effects on job retention, income, the quality and quantity of food consumption, control over household decision-making, and mental outlook for these borrowers. We only find negative effects on other aspects of mental health, principally stress.

     
    Policy Issue: 

    An important means of exiting poverty is access to productive resources, yet many poor people lack the capital necessary to invest in higher education, smooth consumption, or start a business. Expanding access to credit is a common means to enable participation in the economy, and there is a common assumption that expanding access to productive credit makes entrepreneurs and small business owners better off. There is less consensus however, on whether expanding access to credit to support consumption helps borrowers, particularly when loans are being extended at high interest rates to higher-risk customers. 

     

    Context of the Evaluation: 

    Poverty in South Africa is widespread; approximately 57 percent of individuals were living below the poverty line in 2001.  Numerous impoverished areas could potentially benefit from increased access to credit to help smooth household consumption. However, the poor typically lack the credit rating and/or collateral needed to borrow from traditional institutions such as commercial banks.  Moneylenders dominate the informal lending market and typically charge 30-100 percent interest per month.

    The cooperating Lender has operated for over 20 years as one of the largest, most profitable microlenders in South Africa. It offers small loans at high interest over short periods of time, frequently to the working poor who have no collateral and must make payments on a fixed schedule. 

     

    Details of the Intervention: 

    This evaluation examined the direct impact of small consumer loans on profitability, credit access, investment, and measures of well-being such as household consumption and physical and mental health. The sample consisted of 787 rejected loan applicants deemed potentially creditworthy by the Lender. Applicants were eligible if they had been rejected under the Lender’s normal underwriting criteria but not found to be egregiously uncreditworthy by a loan officer. The motivation for increasing credit supply for a pool of marginal applicants is twofold. First, it focuses on those who stand to benefit most from expanding access to credit, namely the unbanked poor. Second, it provides the Lender with information about the expected profitability of changing its selection process to examine marginally creditworthy individuals more closely.

    A random portion of the eligible applicants were then assigned a “second look” by lender staff who were encouraged but not required to approve a randomly selected portion of these applicants for loans. Ultimately branches made loans available to 53 percent of the previously rejected applicants who had been randomly assigned to be re-examined. Accepted applicants were offered an interest rate, loan size, and maturity per the Lender’s standard underwriting criteria. Nearly all received the standard contract for first-time borrowers: a 4-month maturity at 200 percent APR.

    Applicants in the treatment and comparison groups were surveyed six to twelve months after applying for a loan to examine behavior and outcomes that might be affected by access to credit, including mental health outcomes. 

     

    Results and Policy Lessons: 

    Impact for Borrowers: Expanding access to credit is found to significantly increase certain elements of well-being of borrowers. Economic self-sufficiency (employment and income) was higher for treated applicants than for those in the comparison group 6 to 12 months after treatment. Twenty-six percent of treated households report that the quality of food consumed by the household improved over the last 12 months. A subjective measure of “control and outlook”— comprised of factors such as intra-household bargaining power, community status, and overall optimism— is also higher for treated applicants. 

    Long-Term Impact on Creditworthiness: Over a 13 to 27 month horizon, study results indicate a positive impact from having a credit score: having an ordinal score due to their credit history increased the probability of future loan approval in the sample by 19 percent, though there was no impact on the score itself. 

    Impact on Mental Health: Receiving greater access to credit had mixed effects on the mental health of study participants, and results indicated that the mental health impacts of taking up a small individual loan may differ by gender. While the program had no significant effects on the mental health of women, men experienced increased symptoms of perceived stress and decreased symptoms of depression. The fact that even “good” major life events, such as starting a new job, can be stressful at times may explain why men in the treatment group experienced increases in perceived stress as they took up the loans and engaged in new economic activities. The positive impacts that increased credit access had on other areas of life (described above) may explain why symptoms of depression were reduced among men despite the increase in perceived stress.  

    Profitability: Offering loans to marginal applicants, formerly rejected by the Lender’s usual screening process, is also found to be profitable for the Lender, although it is still substantially less profitable than offering loans to more creditworthy applicants. 

    1 Southern African Regional Poverty Network (SARPN), “Fact Sheet: Poverty in South Africa,” http://www.sarpn.org.za/documents/d0000990/

     

    Selected Media Coverage:
    Microlending: It's No Cure-All - Bloomberg Businessweek

    Cosignatory Requirement as a Barrier for Women Accessing Credit in Peru

    Microfinance institutions have long targeted women as recipients due to the belief that women more reliably pay back their loans and the increased access to funds serves to improve women's decision-making power in the household. However, some institutions implement a co-signature requirement in order for women to take out a microfinance loan. This may be acting as a barrier for women to access credit.

    IPA has partnered with Microfinanzas PRISMA, an MFI in Peru, to identify the implications of the cosignatory requirement. The study is set up in four agencies in the Peruvian Highlands: Huancayo, Huaraz, Juliaca and Tarma. Through a geographic randomization of districts, the study divides all new communal banks in these areas into two groups: 1. The control group, in which the cosignatory requirement remains the same, and 2. The treatment group, in which the cosignatory requirement is removed. The study will use a baseline and follow-up survey to analyze whether the removal of the signature is allowing more people to join the banks and if the default rate is increasing. Other questions from the surveys will be within the realm of household dynamics and bargaining.

    Demand for Hospital Insurance in the Philippines

    We partner with Green Bank to assess the demand for hospital insurance among microfinance clients.  Green Bank offered the insurance to clients at randomly assigned premiums.  By observing the take-up rates at different prices, we can measure the price sensitivity.   We also collect an extensive data on demographics and risk characteristics of the individuals in the sample, which allows for an examination of adverse selection in the insurance market (risky individuals are less price sensitive than risk-adverse individuals).

    The impact of information asymmetries on insurance markets is important in theory but ambiguous in practice.  Generations of studies have failed to produce a consensus on the presence, absence, or magnitude of adverse selection and moral hazard in most markets.   While an increasing number of microfinance institutions offer insurance products to their clients as an add-on, there are few empirical studies on the impact of expanding access to health or hospitalization insurance in developing country contexts.

    The sample of our study includes 2,036 existing clients under the Green Bank's individual-lending program (TREES) in 10 branches of Northern Mindanao and Caraga regions. 

    Access to Credit and the Scale-Up of Biometric Technology in Malawi

    Introducing biometric identification substantially increased repayment rates amongst Malawian farmers with the highest risk of default. Researchers are now examining the large-scale impact of biometric technology on repayment and borrower behavior at microfinance institutions across the country.

    Policy Issue:

    Credit enables small-scale farmers and business owners in developing countries to finance crucial inputs such as fertilizer, improved seeds, and business assets. However, formal lenders may be discouraged from lending to the rural poor due to difficulties in ensuring repayment from borrowers who lack adequate collateral or verifiable credit histories. Obtaining reliable information on individuals’ credit history can be difficult in countries without unique identification systems, like social security numbers or government-issued photo identification. Borrowers can avoid sanction for past default by simply applying for new loans under different names or from different institutions. Biometric identification, such as fingerprints, can help lenders identify unique borrowers, verify credit histories, and enforce loan repayment, which in turn can make it cheaper for banks to extend credit to the poor.

    A previous study among paprika farmers in Malawi showed that fingerprinting substantially increased loan repayment among the riskiest borrowers. Researchers are now scaling up the use of fingerprinting for loan enforcement and examining its effects on borrowing and lending across the country.

    Context of the Evaluation:

    Few rural Malawian households have access to loans for business and agricultural purposes: only 11.7 percent reported taking out a loan in the previous year, and among these loans only 40.3 percent were from formal lenders.1 According to the World Bank’s Doing Business Report, which ranks countries on the ease of owning and operating a local business, Malawi ranked 109 out of 129 countries in terms of the supply of private credit.

    Researchers are partnering with the Malawi Microfinance Network, four microfinance institutions (MFIs), and two credit bureaus, Credit Data Malawi and CRB Africa, to expand the use of fingerprinting and introduce a fingerprint-based credit bureau that would enable information sharing across lenders.

    Details of the Intervention:

    Researchers will measure the large-scale impacts of fingerprinting on lending and borrowing across Malawi in partnership with four MFIs, covering over 50 percent of microfinance borrowers in 27 out of 28 districts.

    Two hundred and thirty-six loan officers from the participating MFIs will be randomly assigned to a treatment or comparison group.  All borrowers managed by loan officers in the treatment group will be fingerprinted in the process of loan application.  Borrowers served by officers in the comparison group will not be fingerprinted. To capture the effects of fingerprinting at different stages in the loan cycle and agricultural season, loan officers in the treatment group will fingerprint their borrowers in phases. 

    Researchers will evaluate the impact of fingerprinting on borrower and lender behavior and levels of agricultural output and business productivity among borrowers. In addition, researchers will evaluate any indirect effects on borrowers and lenders nearby the institutions that fingerprinted clients.

    Results and Policy Lessons:

    Project ongoing, results forthcoming.

    Personalizing Information to Improve Retirement Savings

    Can giving users personalized information about the implications of increasing their retirement contributions, formalizing employment, or delaying retirement age on future wealth help them make more informed retirement planning decisions? Researchers are partnering with the Superintendencia de Pensiones in Chile to test a new simulator installed on self-service kiosks at government offices that provides simulations of retirement outcomes based on different contribution decisions for low-income Chileans. Using a randomized evaluation, researchers will study how this intervention affects financial knowledge as well as decisions regarding labor and retirement plans, and whether it is more effective than offering users general retirement savings information.
     
    Policy Issues:
    Defined contribution retirement savings plans, where employees contribute at a minimum amount deducted directly from their salaries, are common in developing countries. However, individuals can make voluntary contributions to the plan, and selecting the most beneficial contribution amount often requires some financial knowledge. Individuals may lack the financial knowledge needed to save adequately for retirement, or may not be aware of the effects that retiring early, failing to formalize their employment, or failing to save more than the required amount will have on their eventual retirement savings. Personalized retirement savings information tailored to each individual’s financial situation may be effective in increasing knowledge and encouraging low-income individuals in the labor force to adopt habits that lead to increased pension contribution.
     
    Context:
    Chile requires formally employed workers to contribute approximately 10 percent of their taxable income to a pension account. However, contribution rates remain low; people may not be formally employed, may avoid contributing, may stop contributing whenever unemployed, or fail to contribute enough to retire comfortably. Low-income individuals, who comprise 65 percent of all pension account holders, can be most affected by low contributions. Lack of information and financial knowledge may also be an issue. A 2009 survey indicated that most members of the Chilean national pension system did not know how their pension would be calculated, and many who claimed to know were unable to answer questions about the topic when asked. 
     
    Description of Intervention:
    Researchers will partner with the Superintendencia de Pensiones in Chile to evaluate the impact of providing personalized retirement savings information on pension contributions of low-income, working-age individuals.
     
    The Superintendencia de Pensiones in Chile is installing self-service kiosks in eight government offices in the metropolitan region of Santiago. At the kiosk, individuals are prompted to identify themselves with their ID and fingerprint. Based on the RUT (ID number), they are randomly assigned to either receive publicly available, generic information on how to improve their retirement savings, or a personalized simulation session which shows how changing current contribution levels affects expected retirement savings balances.
     
    The simulation software running on the kiosks can populate some of the individual’s personal financial information based on their RUT, and also asks about a number of other factors, including retirement age and estimated years of contribution towards their retirement fund. Based on this information, the individual is then shown a projection of their post-retirement finances.
     
    All participants will be surveyed at the kiosk on topics including financial knowledge and retirement fund contribution levels. In addition, government-provided administrative data will allow the researchers to measure impacts on labor force participation and savings behavior over the next five years.
     
    Results:
    Project ongoing, results forthcoming.
     
     

    Unconditional Cash Transfers in Kenya

    While cash transfers have long been a subject of interest as a tool to fight poverty, the overall impact of large transfers of cash, given without conditions, to poor households had yet to be measured. This study evaluated a cash transfer program administered by the NGO GiveDirectly, which gave an average of US$513 to poor families in rural Kenya. The transfers led to significant increases in income, assets, psychological well-being and female empowerment. Variations in the format and size of the transfers led to differences in outcomes.
     
    Detailed results can be found in the policy brief, available here and at the researcher's site, here.
     
    Policy Issue:
    Programs designed to alleviate poverty often focus on delivering goods or services (e.g. productive assets, training, bed nets, etc.) or capital conditional on certain behaviors to poor households. While these types of programs may be effective in achieving specific goals, they do not provide poor households with the choice and flexibility of allocating resources to meet the needs they find most pressing. An alternative approach to delivering support in-kind is to simply give money to poor households. However, this approach is sometimes received with skepticism, as there is no guarantee that money will be spent to achieve the specific impacts that donors desire. This evaluation studied what happened when poor families were given cash without any stipulations.
     
    Context of the Evaluation:
    This study took place in Kenya, a country at the forefront of the mobile money revolution. Since the launch of M-PESA, a mobile-phone based transfer service, in 2007, Kenya has become the country with most extensive retail payment network[1]. GiveDirectly is a non-profit organization that leverages the low costs of mobile money to deliver cash transfers to poor households, reducing the cost of delivery to only 10 percent of each donated dollar. Beneficiaries receive donated money on SIM cards and can visit a local M-PESA agent to exchange the mobile credit for cash. Residents in the area of Rarieda, where the study took place, generally live on an average of approximately US$1 per day, and 64 percent of those surveyed said they did not have enough food in their house for the next day.
     
    Description of the Intervention:
    Households were eligible for the unconditional cash transfer program if they had roofs constructed from non-solid materials (mud, grass, etc). Study villages in the Rarieda district of Kenya were randomly assigned to a treatment or pure comparison group. GiveDirectly identified 1,000 eligible households in treatment villages. Within treatment villages, 500 eligible households were then randomly assigned to receive unconditional cash transfers. These households were compared to 500 control households in the same villages, which did not receive transfers. In addition, the 500 control households were compared with 500 households in pure comparison villages to identify any spillover effects of the intervention. Study households in treatment villages received a baseline survey before randomization, while pure control households where surveyed only at endline.
     
    Transfers were randomly assigned to go to women or men, and further randomized to be in the form of a single lump sum transfer of 25,200 KSH (about US$287), or monthly transfers for nine months with the same total value. A third treatment arm was selected to receive a large sum, with 137 households each given an additional KES 70,000 (about US$798) in seven monthly installments of KES 10,000 each. 
     
    Money was transferred to beneficiaries using Safaricom’s M-PESA mobile payment system—sending money from the GiveDirectly account to the recipients’ SIM cards. Recipients were required to register with M-PESA, and received a text message when the funds were transferred. They could then visit a local M-PESA agent to transfer mobile credit to the agent’s phone in exchange for cash. Most households in the sample were within a 30-45 minute walking distance to an M-PESA agent. Households were given SIM cards to allow them to redeem money, and the opportunity to purchase a mobile phone if they did not have one, with the cost deducted from their transfer. 
     
    A follow-up survey one year after the first transfers collected data on income sources, investment, consumption, food security, school enrollment of children, and mental and physical health. These surveys were complemented by the collection of salivary cortisol levels to measure the impact of unconditional cash transfers on stress.
     
    Results and Policy Lessons:
    Assets and income: Assets and holdings for those who received transfers were 58 percent (US$279, in purchasing power parity, or PPP) higher, primarily in home improvements (such as metal roofs, which are far less costly to maintain), and livestock holdings. The transfers increased income for recipients by 33 percent (US$15 PPP), coming from sources such as livestock and non-agricultural businesses. There is little evidence that cash transfers change the primary source of income for recipients, but they do increase expenditures in non-agricultural enterprises by US$10 PPP per month, with revenues US$11 PPP higher. 
     
    Consumption: Monthly consumption for recipients of the transfers was 23 percent higher (US$36 PPP), spread across nearly all categories measured: food, medical and educational expenses, home improvements, and social expenses such as weddings and funerals. The exceptions were temptation goods: there was no increased spending on alcohol or tobacco. The largest increase was in food consumption, which was 19 percent (US$20 PPP) higher.
     
    Food security: Food security index scores were .25 standard deviations lower for transfer recipients. Specifically, they were 30 percent less likely to have gone to bed hungry in the preceding week, 20 percent more likely to have enough food in the house for the next day, and the number of days children went without food was 42 percent lower.
     
    Health and education: Spending on health education increased for transfer recipients, but from relatively low levels. There were no observed increases in health or education outcomes.
     
    Psychological and neurobiological measures: Overall there was a .20 SD increase in psychological well-being index, stemming from a .18 SD increase in happiness scores, a .15 SD increase in life satisfaction, a .14 SD reduction in stress, and a .99 SD reduction on a depression questionnaire. Levels of cortisol, a stress hormone as measured in saliva samples did not differ across the groups overall, but large transfers and transfers to women lowered levels for both men and women significantly. 
     
    Female empowerment: Positive spillover effects for female empowerment were observed, with an increase of .23 SD on an index of several measures not only for the treatment households, but for all households in the village, suggesting that the transfers can improve the standing of women in general.
     
    Types of transfers: With the exception of well-being outcomes mentioned above, there were no differences observed comparing transfers made to women versus men in the household. Monthly transfers were associated with a .26 SD increase in food security relative to lump sum payments, while lump sum payments were associated with higher asset values. Large transfers led to approximately twice the value of assets as small transfers, as well as higher scores on psychological well-being and female empowerment measures.
     
    More information can be found in the full policy brief, available here and at the researcher's site, here.
     
     

    [1] Klein, Michael, and Colin Mayer. May 2011. “Mobile Banking and Financial Inclusion: The regulatory lessonsWorld Bank Policy Research Working Paper 5664.

    Direct and Indirect Impacts of Credit for SMEs

    How does access to credit affect the growth of small and medium enterprises – both firms receiving loans as well as their competitors, suppliers and customers? Limited access to credit is commonly identified as a key constraint to SME growth, but little evidence exists of the direct and indirect effects of loans on small firms in a given market. Researchers are working with a large bank in the Philippines, using random assignment to offer loans to SME applicants who fall just below the threshold to be automatically approved for a loan. The researchers will compare the firms that received the loans to a similar group that did not. Comparing the two groups will allow for a better understanding of the impact of loans on firm performance and growth as well as any additional effects on firms in the same market or in the loan recipient’s supply chain.  
     
    For additional information on current SME Initiative projects, click here.
     
    Policy Issue:
    Small businesses are often thought to be an important source of employment, innovation, and economic growth. In many developing countries, small and medium enterprises (SMEs) make up a large share of registered businesses, but a much smaller share of GDP. Data from several countries suggest that few SMEs grow to become larger businesses. One reason could be that unlike larger businesses, SMEs have limited access to credit, preventing them from making larger investments to improve their operations, upgrade to new technologies, or expand.
     
    Most SMEs’ financing needs exceed the small loans that microfinance institutions provide. Yet larger commercial banks often find it too expensive to lend to SMEs because the cost of assessing whether an SME is creditworthy is high relative to the return banks could earn by lending to them. Many banks also perceive SMEs as being too risky and more likely to default on loans. Credit scoring has been used extensively in developed countries to reduce the cost and time required to process loan applications and to assess the riskiness of loan applicants in order to make small business and consumer lending profitable for banks. Can a credit-scoring system increase lending to SMEs in emerging markets, and does access to credit improve these businesses’ profitability? How does increased access to credit affect other businesses in the same market, namely the competitors, suppliers, and customers of businesses receiving loans?
     
    Context of the Evaluation:
    In the Philippines, the vast majority of registered enterprises are small or medium sized. Nationwide, there are over 800,000 micro, small, or medium enterprises. These businesses span a range of industry sectors, including wholesale and retail trade, manufacturing, and services. Promoting SME growth is a central focus of national policy and all banks are mandated to set aside at least 8 percent of their total loan portfolios for SMEs. The Development Bank of the Philippines (DBP) is a development banking institution mandated to provide medium and long term loans to SMEs. In 2013, DBP began to roll out its new Retail Lending Program for Micro and Small Enterprises in 45 bank branches across the country. Under this program, DBP will make lending decisions using credit scoring software, which will determine loan approvals based on verifiable client information and an objective credit score, replacing the current approval process which relies on loan officers’ perceptions about applicants’ creditworthiness.
     
    Details of the Intervention:
    Researchers are conducting a randomized evaluation in partnership with the Development Bank of the Philippines (DBP) to test how access to credit affects both borrowing businesses’ performance and that of their competitors and suppliers.
     
    Each of the 45 DBP branches will advertise the new Retail Lending Program to SMEs in their area and encourage them to apply. The branches will be assigned to either target SMEs in certain randomly chosen industries for loans (e.g. bakeries or water purification plants) or to not target any industries in particular. After SMEs submit an application, the credit scoring software will assign each applicant a score. Applicants whose scores fall in a pre-defined range just below the minimum score that automatically qualifies someone for a loan will be randomly assigned to either receive a loan or serve as part of the comparison group. In branches that are randomly assigned to target certain industries, marginally qualified applicants in the targeted industries will have a 90 percent chance of receiving a loan. This randomized “bubble” will include approximately 250 of these marginally qualified applicants.
     
    DBP’s credit committee will then review all loans approved by the credit scoring system prior to final approval, reserving the right to deny loans based on information not included in the credit scoring model, such as criminal history. Loan officers will separately record whether they would have normally approved the loan without the credit scoring system, allowing researchers to compare credit scoring to the current, more subjective lending approach.
     
    Businesses in the treatment group will receive loans between PHP 300,000–10,000,000 (US$5,590–186,200). The terms of the loans will range from three months to five years. A baseline survey will be conducted with all sample firms prior to loan disbursement. One year after the loans are disbursed researchers will conduct a follow-up survey to measure the SMEs’ investment and profits. Administrative data from DBP will be used to measure loan repayment and default.
     
    Researchers will also survey the SMEs’ competitors and suppliers to examine whether receiving a loan had an impact on those firms. Increased access to credit may make SMEs more efficient and profitable, potentially taking away business from their competitors. On the other hand, if increased access to credit leads some businesses to develop better methods of production that their competitors can copy, access to credit could potentially indirectly benefit their competitors. Similarly, access to credit may have spillovers on a loan recipient’s suppliers as a result of business expansion or adoption of new technologies. This study will examine whether increased access to credit indirectly benefits or harms borrowers’ competitors and suppliers.
     
    Results and Policy Lessons:
    Project ongoing.

    Expanding Access to Formal Savings Accounts in Malawi, Uganda, Chile, and the Philippines

    Policy Issue:

    Expanding financial services to reach the poorest of the poor helps to broaden their savings and investment options. Yet the vast majority of people in the developing world remain unbanked [1].  In the absence of formal savings products, many in the developing world depend on costly devices like "susus", agents who charge a fee to collect money for secure keeping, or illiquid devices such as rotating savings and credit associations (ROSCAs), groups that pool members’ regular contributions for lump-sum distribution. A majority of rural households store cash at home, “under the mattress” [2], where it is prone to loss, theft, and the demands of neighbors and kin.

    Early experimental evidence from Kenya suggests that small business owners can benefit from access to a savings account in a formal bank [3].  By understanding the channels through which savings accounts might impact the lives of poor households, financial institutions—and the products they offer—can be better poised to serve this vulnerable population. 

    Context of the Evaluation:

    This study is ongoing in three countries: Malawi, Uganda, Chile. We are currently exploring options to add a study site in the Philippines. The aim is to understand the causes and consequences of the lack of access to banking services in a variety of contexts.

    Malawi: Malawi’s population is largely rural, with agriculture supporting over 85 percent of the population [4].  A 2009 study found that 55 percent of Malawians do not have access to any type of financial institution, formal or informal; furthermore, only 19 percent of the overall population uses a formal bank [2].  In Malawi, the study is being conducted in the Southern Region, which has lower than average levels of bank usage and financial inclusion [2].

    Uganda:A 2006 study found that 62 percent of Ugandans do not have access to any type of financial institution and only 16 percent of the population uses a commercial bank [2]. Total savings remains low: from 1999-2009, Uganda's gross domestic savings averaged 9.3 percent, compared to 21 percent worldwide and 12 percent for the least developed countries [3]. In Uganda, the study is being conducted across several districts in the southwest of the country.

    Chile:Although Chile boasts an upper-middle-income economy, such prosperity is not universally shared.  In 2009, Region IX – the target region for the study – reported the highest incidence of poverty in the country at 27.1%, nearly double the national average [3].  And although Chile has a vibrant financial sector, an IPA-led pilot exercise in the target region revealed that 33% of the population does not use a savings account.

    Philippines:The Philippines has reached a medium level of deposit account usage, with around 50 accounts per 100 people in 2009.  (Globally, there are more savings accounts than people.) [1] While this is to be celebrated, financial inclusion for rural populations has lagged, and 37% of municipalities did not have access to banking services in that year [7].  Recently, however, the mobile money sector has developed, enabling anyone with a mobile phone to conduct basic transactions.  Mobile banking services have great potential to provide access to the rural poor in this context.

    To evaluate the impact of access to a formal savings product, the researchers have partnered with a commercial bank or credit union at each site.    

    Description of Intervention:

    In each site, IPA identified a partnering financial institution and selected rural areas in which the partnering institution is operating. A probabilistic sampling strategy was then used to enroll into the study a representative sample of unbanked households in those areas.  Upon enrollment and completion of a baseline survey, study households were randomly assigned to either a treatment or comparison group. Those assigned to the treatment group received a voucher enabling them to open an account, at no cost to themselves, with the local branch of the partner institution. They also received procedural assistance with account opening. Take-up of the account offer varied from 20% in Chile to 78% in Malawi.

    Follow-up surveys at 6-, 12- and 18-month will be used to estimate the impacts on a range of household activities, including agricultural and business practices, expenditures, household income, response to shocks, and savings and credit practices.Qualitative data will be collected to understand the mechanisms through which access to a bank account affected (or not) the study participants.

    Results and Policy Lessons:

    Results forthcoming. 

     

    1. CGAP. 2009. Financial Access 2009: Measuring Access to Financial Services around the World.  World Bank Group.

    2. FinScope Malawi funded by the UK’s Department for International Development (DFID).  Demand Side Study of Financial Inclusion in Malawi.  2008. http://www.finscope.co.za/documents/2009/Brochure_Malawi08.pdf

    3. Dupas, Pascaline and Jon Robinson.  2009.  Savings Constraints and Microenterprise Development: Evidence from a Field Experiment in Kenya.  NBER: Working Paper 14693.

    4.  Reserve Bank of Malawi.  2008.  The Malawi Economic and It’s [sic] Banking System.   http://www.rbm.mw/documents/basu/MALAWI%20ECONOMY%20AND%20BANKING%20SECTOR.pdf

    5.  FinScope Uganda. 2007. Results of a National Survey on Access to Financial Services in Uganda. Final Report. August. http://www.fsdu.or.ug/pdfs/Finscope_Report.pdf.

    6.  World Bank. 2010. World Development Indicators 2010 [Online Database]. Washington, DC: The World Bank.

    7. Jimenez, Eduardo C. 2010. Financial Access: An Essential Condition. Presentation at the OECD-Banque du Liban Conference on Financial Education.  http://www.oecd.org/dataoecd/57/21/46256657.pdf

    The Real Effects of Electronic Wage Payments: A Field Experiment with Salaried Factory Workers in Bangladesh

    Can employers help unbanked individuals enter the formal financial sector by offering their employees electronic wage payments? Researchers are working with a bank, a mobile money operator, and garment manufacturers to help answer this question. This study will randomly assign employees at select factories to either continue collecting their wages in cash, receive them as a mobile money payment, or as a direct deposit payment into a no-frills bank account. The research team will observe the effects of the new payment channels on the financial behavior of the employees. The researchers will also work with the employers to understand how best to transition to electronic wage payments and determine whether the new electronic payroll systems are a worthwhile investment in terms of cost and productivity.

     
    Policy Question:
    Around the word, half of the adult population does not have a bank account at a formal financial institution.[1] Most of these people are poor and must rely on cash to manage their day-to-day finances and plan for the future. Even as countries aggressively expand their banking infrastructure, poor households often still choose to save informally and many formal accounts remain dormant, preventing their potential welfare benefits from being realized. Electronic payment and savings systems, which reduce the cost and increase the convenience of formal financial services, are one tool with the potential to boost financial inclusion and encourage formal savings in poor households. This study measures the impact of providing workers in Bangladesh with no-frills bank accounts or mobile money accounts and examines if automatically depositing their wages into these accounts can encourage workers to save. 
     
    Context:
    The study takes place in urban Dhaka, Bangladesh, with garment workers in four factories. Few of the factory workers who work on the production line have bank or mobile money accounts, and the use of high cost moneylenders is common. While the workers are currently paid in cash, many do use mobile money platforms for purposes such as transferring money to family members in home villages. However, most workers use vendors’ or other people’s accounts to conduct these transactions, paying high transaction fees in the process.
     
    Description of Intervention:
    Researchers will study if switching workers currently paid in cash to electronic payroll systems based on either bank or mobile money accounts can encourage the use of formal financial services. For the study, researchers are working with a large commercial bank and one of Bangladesh’s mobile money providers to offer accounts to workers in four garment factories in Dhaka. The bank will install an ATM at each of the factory sites and will train workers on how to use the accounts. The mobile money provider will also offer onsite assistance. To understand the effects of cash versus either account, workers will be randomized into one of four groups:
     
    Group 1: Workers will receive a traditional no-frills bank account with training on how to use it, and their wages will be electronically deposited into this account.
    Group 2: Workers will receive a mobile money account and training, and their wages will be electronically deposited into this account.
    Group 3: Workers will receive a mobile money account and training, but will continue to receive their wages in cash.
    Group 4: The comparison group, in which workers will continue to receive their wages in cash as they have been, with no additional accounts set up.
     
    Researchers will survey participants before the accounts are issued and then monthly for the next nine months, followed by a final endline survey. This data will allow researchers to assess how workers’ borrowing, saving, spending, and remittance patterns change when they receive their wages electronically into formal accounts. Researchers will also examine administrative data from the factories at the end of the study to help measure attendance, job performance, and the profitability of switching from cash to electronic payroll.
     
    Results:
    Results forthcoming.
     
    [1] Demirguc-Kunt, A. and L. Klapper (2012). Measuring Financial Inclusion: The Global Findex Database. World Bank Policy Research Working Paper 6025.
     

    Identifying Gazelles among Micro and Small Enterprises in Ghana

    This study examines methods of identifying microenterprises with higher growth potential in developing countries. Researchers surveyed 335 small businesses in Ghana, invited them to participate in a business plan competition, and then tested whether business plan competition judges or survey instruments were better able to identify firms that would grow faster. Both methods worked to predict growth, but survey data were slightly more predictive, and the best growth estimates resulted when both methods were taken together. Training offered to enterprises had no effect, regardless of firm or owner characteristics.
     
    Policy Issue:
    A large number of very small enterprises exist in developing countries, but very few ever scale to a point at which they hire additional employees, despite interventions meant to spur growth in this sector.1 If the microenterprises with higher potential for growth could be identified, resources currently spent on interventions provided to the full set of microenterprises could be diverted to provide more intense support to a much smaller target population. Researchers tested various methods used to identify such businesses and explored whether training could help them achieve growth.
     
    Context of the Evaluation:
    This project targeted self-employed small business owners with modest levels of formal schooling and substantial experience running businesses in urban Accra-Tema and Kumasi. Rather than focusing on a few large businesses, the project aimed to identify a greater number of self-employed entrepreneurs, each with the potential to create a small number of new jobs. These individuals are not likely to be operating cutting-edge businesses but are great in number and provide products and services that are fundamental to the functioning of the local economy, including areas such as business services (e.g., marketing services), retail trade, and basic manufacturing (e.g., producing soap).
     
    Description of Intervention:
    Enterprises were identified through the publication of a business plan competition by radio, newspaper, and door-to-door marketing in neighborhoods containing large numbers of small businesses. To participate in the competition, applicants submitted a form with basic information to ensure compliance with eligibility criteria. Eligible entrepreneurs had to be between the ages of 20 and 55 and be owners of a business that had been in operation for at least one year with two to 20 employees.
     
    Three hundred thirty-five applicants were invited to participate in a three-day program, offered by CDC Consult Limited, designed to guide them in writing a basic business plan. Training participants were asked to submit and present a business plan to a panel of four judges. Each panel, comprised of consultants and successful business owners, scored 12 to 16 business plans on several criteria.
     
    Half of the entrepreneurs were chosen to receive more intensive follow-on training. The selection was random with probabilities increasing with the panel ranking. Those in the top quartile of the rankings had a 75 percent probability of receiving training; the middle two quartiles had a 50 percent chance, while those in the lowest quartile had a 25 percent chance. This second round of training by the National Board of Small Scale Industries consisted of a six-day group course based on the International Labor Organization‘s “Improve Your Business” model. CDC Consult Limited provided individual consulting advice after this course.
     
    A baseline survey was conducted before the initial three-day business plan training course. The survey gathered information on the owner, the history of the business, and enterprise-level data on assets, current employees, and sales and revenues. It also included measurements of risk aversion, numeracy, logical skills, personality diagnostics, and other measures from the entrepreneurial psychology literature. To track growth, follow-up surveys were conducted with all applicants one and two years after the business plan competition. Growth measures included level of sales, profits, and investment, along with the number of paid employees.
     
    Results and Policy Lessons:
    Survey data measured five categories: ability, management practices, access to credit, and two attitudes, one an outlook on the potential for growth and another combining trust, optimism, and internal locus of control. The ability measure - a combination of non-verbal reasoning tests, numeracy tests, years of formal schooling, and financial literacy - was significantly associated with growth as were management practices measured at baseline. Access to credit and both attitude measures were not associated with growth.
     
    The two summary scores provided by the panel of judges, overall prospect of growth and how attractive the enterprise would be to an angel investor correlated highly with growth. Compared with the survey data, the panel scores did not explain quite as much of the variance in growth, however. The two measures together were a stronger predictor of growth than either one alone. The survey measure was somewhat better at predicting growth for more competitive contenders, while panel scores were more useful for separating out those at the bottom of the distribution.
     
    The evaluation of the final intensive training found little effect on growth, regardless of firms’ panel or survey scores. In fact, on average, the training had a slightly negative effect on firm growth and was associated with some firms exiting the market. This finding is consistent with a number of other recent studies that find training has little or no effect on firm growth.
     

    1Schoar, Antoinette. “The Divide between Subsistence and Transformational Entrepreneurship.” In Innovation Policy and the Economy, Volume 10, 57–81. University of Chicago Press, 2010. http://www.nber.org/chapters/c11765.pdf.

    Evaluating Village Savings and Loan Associations in Malawi

    Microfinance institutions have increased access to financial services over the last few decades, but provision in rural areas remains a major challenge. Traditional community methods of saving, such as ROSCAs can provide an opportunity to save, but do not allow savers to earn interest on their deposits as a formal account would, or provide a means for borrowing. Savings Groups attempt to address these shortcomings by forming groups of people who can pool their savings in order to have a source of lending funds.

    Policy Issue:

    Although during the last decades microfinance institutions have provided millions of people access to financial services, provision of access in rural areas remains a major challenge. It is costly for microfinance organizations to reach the rural poor, and as a consequence the great majority of them lack any access to formal financial services.  Traditional community methods of saving, such as the rotating savings and credit associations called ROSCAs, can provide an opportunity to save, but they do not allow savers to earn interest on their deposits as a formal account would.  In addition, ROSCAs do not provide a means for borrowing at will because though each member makes a regular deposit to the common fund, only one lottery-selected member is able to keep the proceeds from each meeting.

    Village Savings and Loan Associations (VSLAs) attempt to overcome the difficulties of offering credit to the rural poor by building on a ROSCA model to create groups of people who can pool their savings in order to have a source of lending funds.  Members make savings contributions to the pool, and can also borrow from it.  As a self-sustainable and self-replicating mechanism, VSLAs have the potential to bring access to more remote areas, but the impact of these groups on access to credit, savings and assets, income, food security, consumption education, and empowerment is not yet known. Moreover, it is not known whether VSLAs will be dominated by wealthier community members, simply shifting the ways in which people borrow rather than providing financial access to new populations.

    Context of the Evaluation:

    The Village Savings and Loans program in this study is implemented in rural communities in the Mzimba, Zomba, Mchinji and Lilongwe districts in Malawi.  Community members in these four districts are predominantly engaged in agricultural activities.  With little access to formal financial institutions, these small farmers do not have the opportunity to invest in agricultural inputs like fertilizer that could increase their income.

    Description of the Intervention:

    Three hundred eighty villages were selected to participate in this study and randomly assigned to a treatment or comparison group. Half of the villages in the treatment group were introduced to the VSLA model by field officers trained by CARE and its local implementing partners.  Local village agents were subsequently selected from each village and trained to replicate the VSLA training in a second village in the treatment group.

    Field officers and local village agents present the model to villagers at public meetings. Those interested in participating are invited to form groups averaging about twenty and receive training.  These groups, comprised mostly of women, meet on a regular basis, as decided by members, to make savings contributions to a common pool.  At each meeting, members can request a loan from the group to be repaid with interest. This lending feature makes the VSLA a type of Accumulating Savings and Credit Association (ASCA) providing a group-based source of both credit and savings accumulation. CARE’s VSLA model also introduces an emergency fund, allowing members to borrow money for urgent expenses without having to sell productive assets or cut essential expenses such as meals.

    This study will assess the impact of VSLA trainings and group membership on access to credit, savings and assets, income, food security, consumption education, and empowerment.

    Results and Policy Lessons:

    Results forthcoming.  

    We are also working with CARE to evaluate their VSLA programs in Ghana and Uganda.

    Small and Medium Enterprise Financing and Mentoring Services in Emerging Markets in the Dominican Republic

    Policy Issue
    Recent work in the area of development finance has focused on poverty reduction through microfinance institutions (MFIs). These institutions are thought to enable entrepreneurship by providing small personal loans to borrowers who otherwise would have difficulty accessing capital markets, but new entrepreneurs are also faced with complex financial decisions for which they may be unprepared. Studies have shown that there is a strong association between higher financial literacy and better business decisions and outcomes, but there is little evidence on the best ways to quickly convey complex financial practices to business owners. Should courses place more weigh on conveying every aspect of complex materials, or teaching basic concepts in greater depth?
     

    Context of the Evaluation
    In the Dominican Republic, ADOPEM is a savings and credit bank which serves primarily low-income urban individuals and small businesses. They offer loans of US$70 – US$1,400 to both individuals and groups, and also operate a training center with programs covering basic computing, entrepreneurship, and trade skills. Many clients operate small businesses with few or no employees, including enterprises such as general stores, beauty salons, and food services, which bring in an average of US$85 per week. Many ADOPEM clients have been found to have errors in their accounting books, and relatively few individuals kept their business and personal accounts separate.
     
    Details of the Intervention
    Researchers partnered with ADOPEM to evaluate two methods of financial literacy training: one which emphasized classic accounting principles, and one which focused on simple “rule of thumb” methods for decision making. From a pool of 1,193 ADOPEM clients who had expressed interest in financial training, two-thirds were assigned to receive five to six weeks of training, which was offered once a week for three hours at a time and included out-of-class assignments. These classes were taught by qualified local instructors with experience in adult education, and were offered for free or nearly free. Two variations  of the training were tested:

    Accounting Treatment:  This program was adapted from financial education models designed by Freedom From Hunger and the Citigroup Foundation, and focused on a traditional, principles-based approach to accounting techniques. It covered topics such as daily record keeping of cash and expenses, inventory management, accounts receivable and payable, and calculating cash profits, and investment.

    Rule of Thumb Treatment:  This treatment taught participants simple rules for financial decision making, focusing on the need to separate business and personal accounts. It taught clients about paying oneself a fixed salary, distinguishing between business and personal expenses, and easy-to-implement tools for reconciling accounts.
     
    Additionally, a randomly selected subset of each treatment group received weekly follow-up visits from a financial counselor, in an effort to distinguish between the effects of having learned the material and the effects of actually implementing it regularly in business practices. Counselors visited participants and answered any questions they had about course material, verified and encouraged completion of accounting books, and helped correct any mistakes that they found.
     
    Results and Policy Lessons
    Effects on Business Practices: Results indicate that the “rule of thumb” treatment had significant effects on clients’ business practices. The likelihood that clients were separating business and personal cash and accounts, keeping accounting records, and calculating revenues formally increased by 6 percent to 12 percent relative to the comparison group. By contrast, the accounting treatment seems to have had no impact on business practices.
     
    Effect on Revenue Streams: Participants in the "rule of thumb" treatment reported an increase of 0.11 standard deviations on an index of revenue measures. The most significant effect is observed in the level of sales during bad weeks. The "accounting" treatment had no impact on revenues.
     
    There was no discernible impact of receiving follow-up visits from counselors on either treatment group. There were, however, some differences in treatment effects across various groups. Training had a larger effect on more educated clients’ likelihood to separate business and personal cash and likelihood to save. Additionally, the “rule of thumb” treatment also had a larger impact on people who had not expressed great interest in accounting training. This suggests that charging fees or making training programs optional may not target programs to those who will benefit most.

    Urban Property Rights in Mongolia

    Do property and land rights lead to better access to credit and increased investments in one’s land? It is widely assumed so, but there is little evidence to support this assumption. In this study, researchers go to Mongolia where many recent migrants to urban areas lack property rights. Researchers are evaluating the impact of two versions of a program that provides direct assistance to households seeking to privatize and register land plots. They will measure the program’s impact on the migrants’ access to credit, investment in land and housing, property values, labor market outcomes, and household income.

     
    Policy Issue

    Having a well-defined system of land and property rights is thought to be extremely important for increasing investment, as ownership of land may incentivize investment by ensuring that tenants receive the long-term returns from improving their land. Property rights may also be an important component in access to credit, since land can be used as a collateral asset and increase the likelihood of a borrower receiving a loan. Large land-titling policies have been undertaken in several developing countries, particularly in South America and Southeast Asia in order to increase land investments and income security. However, the linkage between property rights, access to credit, and increased investments has not been well-established empirically.

    Context of the Evaluation

    More and more poor rural Mongolians are abandoning traditional nomadic herding practices and migrating to the cities in search of better lives. The bulk of these migrants are moving to Mongolia’s three biggest cities – Ulaanbaatar, Erdenet and Darkhan – where they either settle in suburban “ger areas” or peri-urban rangeland areas, often creating informal settlements. Mongolian laws give ger area residents the right to obtain ownership to the land upon which they live. However, the complexity and expense of this process make it difficult to become an owner and thus use the land as a marketable asset.

    The Urban Property Rights Project aims to improve the formal system for recognizing and transferring land rights to ger area residents. This effort includes legal and regulatory reform, upgrading the technology necessary for accurate land parcel mapping, and providing direct assistance to households to privatize and register their land plots. The project is being carried out in Ulaanbaatar and eight other regional centers. 

    Details of the Intervention

    This evaluation focuses on the land titling component of the project known as the Privatization and Registration of Ger Area Land Plots Activity. This component will provide direct assistance to 75,000 households seeking to privatize and register land plots in urban ger areas. A random subset of eligible houses in the area will be randomly chosen to receive door-to-door assistance with the registration process. This assistance will include support for both the necessary paperwork as well as the registration fees.     

    After the program is implemented, the researchers will evaluate its impact on access to credit, investment in land and housing, property values, labor market outcomes and household income using both household level surveys and aggregate institutional data.

    Results and Policy Lessons

    Results forthcoming.

    Mobile-izing Savings: Defined-Contribution Savings on a Mobile Money Platform in Afghanistan

    Behavioral research suggests that self-control, procrastination, attention, and other behavioral biases are an important limitation to the ability of individuals to set aside savings for the long-term. The development of mobile money infrastructures in many developing countries is creating new opportunities for the design and offer of financial products that can help low- and moderate-income individuals overcome these barriers. Researchers are partnering with a mobile money provider to see if offering employees the opportunity to automatically contribute a portion of their paycheck increases their long-term savings.

    Policy Issue: 
    Savings enable people to accumulate smaller sums over time for large purchases, emergencies, and investments. In countries with no health insurance or social security, savings are all the more critical for the well-being of the poor, but people face several barriers to saving. Behavioral research suggests that lack of self-control, procrastination, and inattention are important barriers to developing healthy financial behaviors. These barriers, exacerbated by lack of access to appropriate financial services and information, may lead individuals to save less than they would like. The rapid proliferation of mobile money is paving the way for the delivery of financial services that are designed to meet the financial needs of low- and moderate-income individuals in developing countries. Increasingly, financial institutions and employers have the opportunity to develop products to help individuals save more and develop healthy financial behaviors. 
     
    Research from developed countries shows that automatically transferring a default amount into long term and retirement savings accounts can be very effective at increasing deposits. With the expansion of a new mobile financial services infrastructure, these insights can now be tested in a developing country context. 
     
    Evaluation Context:
    This project is being implemented in Afghanistan, which has one of the lowest bank account penetration rates in the world. An estimated 91% of the adult population does not have an account at a formal financial institution. The savings rate is also very low, with only one in seven adults estimated having saved any money. Mobile phone penetration rates, on the other hand, are quite high, with an estimated 54% of the population using mobile phones. In this context, Roshan, Afghanistan’s leading mobile communication provider, launched M-Paisa, a mobile payments system with great potential to improve the country’s financial landscape. M-Paisa currently has approximately 1 million registered users, and around 50,000 people receive their salaries via mobile money.
     
    This study targets approximately 1,200 employees of Roshan located across seven field offices, in both rural and urban locations around the country. With a median monthly salary of $450 the study sample is diverse, including a large group of moderate-income individuals, who, due to their close association with Roshan, are often the “early adopters” of innovative mobile money products.
     
    Intervention Description: 
    The proposed intervention will make a mobile savings account available to all Roshan employees. This account, called M-Pasandaaz, is linked to each employee’s existing M-Paisa mobile money account, so that employees may deposit and withdraw funds to the M-Pasandaaz account using the nationwide network of M-Paisa agents.
     
    Researchers will randomly assign employees to groups to test the impact of three different treatments.
     
     
    1. Default contribution: M-Pasandaaz accounts can be categorized under two broad headings, “5% Default Contribution” and “No Default Contribution.” Employees in the “5% Default Contribution” group will be automatically enrolled to contribute 5% of their salary to savings, whereas employees in “No Default Contribution” will be given access to the M-Pasandaaz account with no automatic contribution. Employees are allowed to change their automatic contribution levels or opt-out of any of the automatic contribution plans at any point.
    2. Employer savings-match incentive: Each group mentioned above will be further divided into 2 sub-groups. In one of the sub-groups, employees who make regular contributions to their M-Pasandaaz account for at least 6 months, without making any withdrawals, will receive a 50% match from the employer on their contributions of up to 10% of their salary. The other sub-group will not be eligible for this incentive.
    3. SMS messaging: Researchers will randomly vary the information provided to employees about M-Pasandaaz through text messages, which will be sent directly to employees by Roshan’s HR office each month, for a period of six months. One third of the sample will not receive any information, while the remaining two thirds will receive one of two types of messages: one group will receive simple reminder messages detailing enrollment status and providing instructions for how to switch plans, and the other will receive the simple reminder combined with a breakdown of their savings account balance.
     
    Results:
    Results forthcoming. 
     

    Interfirm Relationships and Business Performance in China

    Business networks can play an important role in firm growth, but in many developing countries, limited information sharing systems and poor contract enforcement mechanisms may make it difficult for businesses to establish relationships with the best set of partners. Governments in some developing countries work to address this challenge by organizing business associations that are meant to promote networking. This study evaluates one such program in Nanchang, China in which some firm managers are randomly assigned to participate in small group meetings for one year. Variations in the intervention will offer insight into the mechanism behind the impact of business connections and the optimal design for networking programs.
     
    Policy Issues:
    Small and medium enterprises (SMEs) are thought to be an important engine of economic development, but in many low income countries, SMEs face significant barriers to growth, often caused by failures in local market systems and institutions. Much of the existing research on constraints to growth for SMEs focuses on interventions that target firms on an individual level, such as access to finance or managerial expertise. However, businesses rely on relationship for knowledge on business practices, loans in the form of trade credit, necessary inputs, and a range of other opportunities. Business connections may therefore play an important role in the success of a firm. However, limited information sharing systems for partner identification and poor contract enforcement mechanisms found in many developing countries may make it difficult for business managers to connect with the best set of partners. Governments in some developing countries work to address this barrier by organizing business associations that are meant to promote networking. However, limited research on business networks exists to inform program design. This study looks at the overall impact of a business networking program on firm performance, and variations in the intervention offer insight into whether and how business networks facilitate information sharing and peer training. The study further examines how group composition and meeting frequency breakdown barriers to business networking by building trust and facilitating information flows.
     
    Context:
    Over the last decade, Nanchang, the capital of Jiangxi province in southern China, experienced rapid economic growth. This was accompanied by the creation of a large number of new firms, including over 30,000 SMEs formed between 2012 and 2014. According to local policymakers, establishing new business connections is a key challenge faced by managers of these firms as they work to grow their business. 
     
    Details of the Intervention:
    In the summer of 2013, managers of 11,000 recently-formed SMEs were invited to participate in the study. Participating firms had on average 33 employees and were primarily in the manufacturing, software, or business services sectors. Managers of 1,400 firms were randomly assigned to participate in meetings with other managers. The managers met in the same group of 10 participants every month for one year. The remaining 1,000 managers were assigned to a comparison group that did not participate in meetings.
     
    The first business meetings were organized in collaboration with the Commission of Industry and Information Technology (CIIT) in Nanchang, a government department that works with small businesses. All subsequent meetings were organized by the participating managers themselves.
     
    To explore the mechanism behind network formation, the groups were further divided. First, to gain insight on the role of networks in the spread of information, some managers from the meeting and non-meeting groups were provided with information about a new loan product. Researchers will compare the spread of information between those who meet regular and those who do not participate in organized meetings.
     
    To learn about the motivation behind business connections and the effects of group composition on peer training, meeting groups were varied so that some included managers from similar firms and other include managers from firms that differed in size and industry. To explore whether managers are lacking connections with other managers from similar firms or different firms, researchers will compare the number of new connections made in the two group types. The difference in the number of connections made will also offer insight into whether connections are driven by active choice or chance. Researchers will additionally compare changes in managerial skill and profitability to learn about the level of peer training in different groups.
     
    Finally, to learn more about two key barriers to network creation, poor contract enforcement and limited information sharing systems that make it difficult for managers to identify potential partners, researchers will explore the impact of one-time cross-group meetings which will take place about six months after the monthly meetings begin. These meetings should break down the partner identification barrier, but levels of trust, which may be more important in the absence of strong contract enforcement mechanisms, are expected to be higher between managers who meet repeatedly. Researchers will compare connections made in one time meetings with those resulting from repeat meetings and will also conduct trust games with participants who meet just once and those who meet repeatedly.
     
    A baseline survey collected information on business performance, managerial practices, and detailed information on social connections and business partners. Firms will be resurveyed after the year of monthly meetings has concluded and one year later.
     
    Results and Policy Lessons:
    Project ongoing. Results forthcoming.

     

    Jing Cai, Adam Szeidl

    Relationship Banking in India

    Promoting frequent communication between loan officers and clients can help banks learn about the reliability of existing and potential clients. However, there is little evidence on how personalized interactions influence client behavior.  This randomized evaluation tested whether the intensity of personalized interaction between borrowers and loan officers in India influenced borrowers’ repayment behavior and found that clients with personal relationship managers at the bank had better repayment behavior but were not more satisfied with their loans overall.

    Policy Issue:

    It is difficult for banks to assess the credit risk of small and private firms because financial information on these potential borrowers is often unverifiable or hard to obtain and loan contracts are difficult to enforce if the client decides to default. One solution tested in this paper to substitute for the lack of enforceability by increasing the loyalty of clients by establishing close ties between the bank and the borrower: We test whether relationship lending improves the loan performance by establishing a personal relationship between the borrower and the lender through frequent interactions.

    Promoting close relationships between loan officers and their clients might not only help banks learn about the reliability of a borrower but also has the potential to change the borrower’s behavior. For example, a borrower might feel a sense of personal responsibility towards his or her loan officer and hence be more hesitant to default. If having a personal tie with the loan officer makes banking easier, the client may be reluctant to switch to a different bank given that building new relationships takes time and effort. However, past research has overlooked this dimension of relationship lending, and there is little evidence on whether and how personal interactions with lenders change borrowers’ behavior.

    Context of the Evaluation:

    ICICI bank is the largest commercial bank in India. In 2005, ICICI introduced a small business loan that did not require any collateral and allowed overdrafts, essentially functioning like a credit card. . The target group of borrowers included small manufacturers, trading companies, and service providers.

    To reduce overhead costs, ICICI wanted to avoid assigning individual loan officers to interact with each client. Instead, the bank relied on computer-based credit scoring and minimal interaction between the borrower and the bank when introducing the product. Credit appraisal was based on characteristics such as business type, information about the client’s reliability as a borrower as inferred from past bank statements, references, credit reports, and financial information based on unaudited financial statements or income tax returns. Accounts with more than three late payments or warnings per year risked losing loan renewals or being closed.

    Description of the Intervention:

    In partnership with ICICI, the researcher used a randomized evaluation to test whether close personal ties between the bank and the client can affect the loyalty and repayment behavior of clients. The researcher randomly assigned 1,319 borrowers to four groups that varied in the level of personalized attention borrowers would receive:

    High Intensity (320 borrowers): The bank matched borrowers with a personal relationship manager who they could contact via phone or email. Each personal relationship manager called their client every other week to establish trust with the client and to check if the client had any administrative issues with the loan (for example, if monthly statements had not been received or if checks had not been deposited). If the client missed a payment deadline, the relationship manager would also remind the borrower to pay on time to avoid late fees.

    Medium Intensity (339 borrowers): Borrowers in this group received the exact same treatment as the “high intensity” group with two exceptions: clients did not receive phone numbers of their relationship managers and instead of interacting with a dedicated relationship manager, their contact manager varied randomly with each biweekly call.

    Low Intensity (324 borrowers): Borrowers did not receive any regular calls from relationship managers and received only a reminder call when a payment due date was approaching. The bank randomly assigned callers to clients and made no attempt to establish a personal relationship between the caller and the client.

    Comparison Group (336 borrowers): Borrowers did not receive regular calls or any other follow up. They received text message reminders in addition to their monthly account statements as part of the standard bank policy.

    Results and Policy Lessons:

    Overall, clients assigned to personal relationship managers had better repayment behavior compared to those not assigned to any relationship managers, and the bank rewarded them with more favorable loan terms. While borrowers assigned to a dedicated relationship manager were more responsive to calls from the bank compared to borrowers in contact with multiple managers, they also complained more.   

    Impacts on repayment behavior:Building a relationship between managers and clients reduced late payments and, in particular, reduced the likelihood of repeated late payments. Borrowers in the “high intensity” and “medium intensity” groups had on average about 0.1 fewer late payments relative to the comparison group. Among borrowers who made at least one late payment, those who were assigned personal relationship managers (i.e. those in the high and medium intensity groups) were more than 20 percentage points less likely to have a second late payment relative to those in the comparison group. The “low intensity” treatment did not have a significant impact on late payments.

    Better repayment among borrowers helped them secure more favorable terms with the bank. Borrowers in the “high intensity” and the “medium intensity” groups were more likely to receive a designation from the bank that qualified them for automatic renewals of their loans relative to the comparison group. Borrowers in the “high intensity” group were also more likely than the comparison group to receive an offer to increase their loan size when their accounts were renewed.

    Impacts on client complaints and satisfaction:Borrowers with a dedicated relationship manager were 1.6 percentage points more likely to respond to the biweekly calls compared to those with multiple relationship managers, who responded 87 percent of the time. However, borrowers with dedicated relationship managers logged more complaints than borrowers with multiple managers, and they were less likely to have their complaints resolved. One potential explanation is that having a dedicated relationship manager increased clients’ expectations, which in turn made them more likely to make complaints and demand improved service. There was no evidence that borrowers with dedicated relationship managers were more satisfied with their loans overall.

    Related Paper Citation:

    Antoinette Schoar, “The Personal Side of Relationship Banking.” Working Paper. 

    Estimating the Impacts of Microfranchising on Young Women in Nairobi

    Youth unemployment is a major challenge in many low-income countries, and evidence suggests young women in urban areas are disproportionately affected. This study in Kenya evaluates the Girls Empowered by Microfranchising program, which connects unemployed participants with local business franchisors and provides mentoring and startup capital for participants to launch businesses. The study will measure the direct impacts of the microfranchising intervention on participants; compare program impacts to the effect of a cash grant program; and estimate the impact of new microfranchises on nearby businesses.

    Policy Issue:

    Youth unemployment is a major challenge in many low-income countries, and evidence suggests young women in urban areas are disproportionately affected. While many programs have attempted to increase young women’s physical and human capital, evaluations of these programs have generated mixed results. However, there is mounting evidence that multifaceted economic empowerment programs that combine job skills or vocational training with more holistic life skills education can have substantial impacts on the entrepreneurial activities of young women. Microfranchising is a recent policy innovation that falls in this category. Microfranchising programs connect unemployed participants with local franchisor businesses, providing motivated individuals with an established business model and the capital and business linkages needed to make their business model operational. In developing country settings where formal sector employment is relatively unavailable to young women, microfranchising programs may be especially valuable. This study is the first ever impact evaluation of a microfranchising program.

    Context of the Evaluation:

    This study targets young women aged 16 to 19 residing in slum areas of Nairobi. In Kenya, 55 percent of urban women aged 15 to 25 in the labor force are unemployed, as compared with 34 percent of young men in urban areas, 28 percent of young women in rural areas, and 18 percent of young men in rural areas.1

    The International Rescue Committee (IRC), the implementing partner in this study, which had implemented a microfranchising program in Sierra Leone, partnered with researchers and IPA to evaluate the impact of the Girls Empowered by Microfranchising (GEM) program in Kenya.

    Description of the Intervention:

    Researchers are conducting a randomized evaluation in Nairobi to measure the direct impact of the GEM program on a range of participant outcomes, compare program impacts to the effect of cash grants comparable in value to the microfranchising package, and estimate the effects of the GEM microfranchises on existing businesses.

    After IPA conducted an initial survey in 2013, 1,341 willing participants were randomly assigned to either the GEM program, a cash grant program, or a comparison group.

    Women assigned to receive the GEM program, implemented by the IRC in coordination with two community-based organizations, were invited to attend an orientation, followed by a 10-day business and life skills training course, and a several-day-long franchise-specific training. Those who completed the trainings received start-up capital in the form of equipment and supplies worth approximately US$200 to start up a new business. The micro-franchisees then launched their businesses with one of two relatively well-known firms in Kenya, a prepared foods franchisor and a hair salon franchisor. Mentors from the community-based organizations regularly visited participants, providing ongoing support over the first months after launching the business.

    Women assigned to the cash grant program, implemented by IPA, were invited to initial information sessions where they learned about the unconditional cash grants of 20,000 Kenyan shillings (approximately US$200).  Grants were distributed at subsequent meetings and participants were given the option of receiving the grants in cash or through mobile money transfers.

    In addition to comparing the impact the GEM program to the provision of comparably sized cash grants, researchers are measuring the direct impacts of the microfranchising intervention on participants approximately one year after launching a microfranchise; the indirect impacts of the GEM program on women whose friends participated in the program; the number of microfranchises that succeed or fail within the first year and factors associated with success; and the impacts of the newly launched microfranchises on pre-existing businesses in the target neighborhoods.

    Results and Policy Lessons:

    Results forthcoming

     


    [1] UNDP. Discussion Paper: Kenya's Youth Employment Challenge, January 2013. 

    Developing Sustainable Products for the Financially Underserved

    Americans who have difficulty formally accessing credit from conventional financial institutions often turn to costly products such as high-interest pawn and payday loans or bank account overdrafts. Researchers in this study have partnered with a community development credit union to evaluate the demand for safe, affordable, and transparent small dollar loans, and the impact of behaviorally-informed product features on the financial capability of credit union members.

    Policy Issue:

    Many individuals in the United States have difficulty accessing credit from conventional financial institutions, or find that existing product offerings do not adequately meet their needs. Some turn to costly alternative forms of credit – including high-interest pawn and payday loans or bank account overdrafts – witheffective annual interest rates frequently exceeding 300 percent.1  Community development credit unions have a strong interest in meeting the demand for affordable small personal loans with products that are financially sustainable for borrowers and lenders alike.

    This research seeks to advance the field of financial capability and provide insights for practitioners and researchers seekingsustainable and responsible methods of extending credit to low-income individuals looking to borrow in small amounts.

    Context of the Evaluation:

    Twenty-six percent of California’s population conducts some or all financial transactions outside of the mainstream banking system, according to the FDIC, and California’s concentration of alternative financial service providers (e.g. check cashers, payday lenders, and pawn shops) is approximately double the US average.2 Classified as a “permissive state” for payday lending by the Pew Charitable Trust, California permits effective annualized interest rates as high as 459 percent, with an estimated 5 percent of its population using payday loans. 3 4

    Self-Help Federal Credit Union, the partner in this study, is a California-based community development credit union offering loans and financial services to underserved communities.5 Self-Help estimates that 75 percent of borrowers in this study will be Latino and 75 percent will earn less than 80 percent of the median income of California’s Bay Area and Central Valley.

    Details of the Intervention:

    The study will rigorously evaluate whether behaviorally-informed savings and repayment features can nudge low-income borrowers to pay down their loan balances more quickly, make a transition towards saving, and improve their financial well-being. This study focuses on two new products targeted at advancing financial capability: the Just Right $300-$1000 loan, and the Just Right $300-$500 line of credit, both of which Self-Help launched in March 2014.

    The study will take place in Self-Help’s 17 branches in California and three branches in Chicago. The new products will be marketed to Self-Help’s Community Trust division credit union members and the check cashing clients of Self-Help’s Prospera branches. Self-Help aims to open 2,000 loans and lines of credit during the 15-month enrollment period.

    The study will consist of two key components: a non-randomized evaluation of alternative underwriting strategies and loan sustainability, and a randomized evaluation of add-on savings and payment features.

    The randomized component of the study will evaluate three new product features that accompany the loan and the line of credit:

    1)    Savings Plus, an offset savings feature added to Just Right loans to encourage saving while borrowing in exchange for an interest rate rebate on deposits;

    2)    Pay Yourself Back,a savings feature added to Just Right loans to encourage saving after borrowing;

    3)    FastPay, an accelerated repayment feature added to Just Right lines of credit to allow borrowers to raise their minimum monthly payment in order to pay down their balance at an accelerated rate.

    The features are designed to build trust, promote success, and create opportunity by helping consumers use credit products safely; specifically, they leverage behavioral tools such as habit formation and pre-commitment to help clients improve their financial health. All customers who sign up for a Just Right loan or line of credit will be randomly assigned to either a feature or comparison group, with approximately 333 clients per group.

    Researchers will evaluate the impact of the products on loan repayment rates, household savings rates, and credit report indicators over a 1- to 2-year time horizon. Additionally, data on baseline behavioral characteristics of borrowers will be used to assess whether borrowers with certain traits – such as a high level of present bias or a tendency towards procrastination – benefit differentially from the add-on features.

    Results and Policy Lessons:

    Results forthcoming. 



    [1] Center for Responsible Lending (2012).  “Fast Facts – Payday Loans.” http://www.responsiblelending.org/payday-lending/tools-resources/fast-facts.html

    [2] Federal Deposit Insurance Corporation (2012). “FDIC 2011 National Survey of Unbanked and Underbanked Households.” https://www.fdic.gov/householdsurvey/2012_unbankedreport.pdf

    [3]The Pew Charitable Trusts (2014). “State Payday Loan Regulation and Usage Rates.”

    [4] Consumer Federation of America. “California State Information.”

    [5] Self-Help Federal Credit Union (2012). “Who Are We?”

    Alarm Boxes: Combining Commitment and Reminders

    Products that remind people to save may improve individuals' ability to take future needs into account, stall unnecessary consumption in the present, and change savings behavior. Working with Ecofuturo, a for-profit bank in Bolivia, IPA developed an innovative lockbox with a daily alarm that could only be turned off by depositing money. IPA tested the impact of the alarm box technology on a the clients' savings behavior over a one-year period.

    Policy Issue:

    In addition to the lack of banking infrastructure, many other constraints limit the availability and effectiveness of savings services for the poor. There has been very little research to map the demand for services so that products can be designed with clients’ needs and cash-flow in mind. These constraints in the supply and demand for savings service point to the need for specialized market research and product development efforts.  Efforts to unveil the actual needs and perceptions of low-income clients to better devise products and incentives for them may result in more rigorous savings behavior.  

    The proposed intervention is based on the idea that individuals do not foresee events in the future and thus do not save for those unexpected needs in the present. Furthermore, individuals lack a safe place to save money temporarily and require a means to curb impulsivity. As a result, mechanisms to remind clients in a frequent and timely manner to save now, such as programmed alarms and lockboxes that do not allow for easy access to these savings, may improve the ability of clients to take future needs into account, stall unnecessary consumption in the present, and consequently change savings behavior.

     
    Context of the Evaluation: 

    Although the gross domestic savings rate in Bolivia in 2009 averaged about 20 percent of the country's GDP, on par with its neighbors (Peru at 26 percent and Ecuador at 21 percent), Bolivia’s savings rate has been historically much lower than those of other countries in Latin America, and access to savings services is severely constrained among the poor.1 Given the predominance of microfinance institutions (MFI) in the financial services sector in Bolivia, the responsibility of generating savings products and services for the poor generally falls on these institutions. Increasingly, due to the commercialization of the sector in Bolivia, the capturing of savings has become a major driving force behind MFI sustainability and growth.

    Ecofuturo is a for-profit Bolivian microfinance institution that operates in many regions of Bolivia. Ecofuturo offers an array of individual credit, insurance, and savings products. These savings products range from basic non-programmed accounts to more complex commitment accounts that require the client to meet deposit quotas in order to qualify for rewards, such as higher interest rates. Working with Ecofuturo, IPA developed an innovative lockbox with a daily alarm that can only be turned off by depositing money. The lockbox acts as a psychological barrier to impulsivity by requiring its owner to visit the local bank branch where designated bank staff keep the key. By incorporating the use of alarms to the already familiar concept of lockboxes (i.e. piggy banks), IPA will test the impact of a technology that is both simple and cost-effective. The alarm acts like a reminder, not unlike a text message reminder to a cell phone, but over a period of time could prove to be more cost-effective and relevant for those who do not have access to a cell phone.

     
    Details of the Intervention: 

    IPA first tested the alarm box with a small pilot sample with plans to launch the product to approximately 800 Ecofuturo clients to evaluate its impact on savings behavior. In total, IPA will work with 2400 existing savings account holders. Two-thirds of the clients will be randomly selected to get an offer of a lockbox, and of those clients, half will be offered boxes with alarms. The remaining group of clients will serve as a comparison group. The impact of an information wheel that clients can use to determine daily savings amounts required to ascertain a goal in a given time will also be assessed. Within each of the three groups (comparison, lockbox, lockbox with alarm), half of the clients will be randomly selected to receive the wheel. Savings rates and frequencies will be measured amongst treatment and comparison groups after approximately one year.

     
    Results and Policy Lessons: 

    Results forthcoming.

     

    1 The World Bank Group. http://data.worldbank.org/indicator/NY.GDS.TOTL.ZS

    Introducing Financial Services to Newly Monetized Native Amazonians

    Many isolated indigenous communities in Latin America are getting increasing exposure and access to money. Villagers, such as those in the Amazonian basin where this study is being conducted, may be better able to save money by using a simple product like a savings lockbox. Partnering with a Bolivian non-profit, researchers are evaluating the impact of such products on the savings habits of the Tsimane’, an Amazonian society that, research shows, has very high rates of impulsivity. What happens when recipients are given a lock box with a key compared to those who, to access their savings, have to travel to the nearest town to get the key? How do the savings habits of these groups compare to those not given a lock box at all? 
     
    Policy Issue:
    In many indigenous communities throughout Latin America, traditional economies based on barter and reciprocity are rapidly becoming monetized. This is especially true in the Amazon basin, where the construction of new roads and encroachment by cattle ranchers and colonist farmers give native Amazonians increasing exposure and access to money.  Many governments have also introduced wage-earning teachers, child support subsidies, and social security to the elderly in these remote areas. As a result, in indigenouse Amazonian communities where most people still depend on hunting, fishing, plant gathering, and subsistence farming for food and shelter, money is becoming an increasingly important part of the village economy. However, savings culture and financial tools to promote the accumulation of money for larger purchases and emergencies do not exist in many of the communities.
     
    Context of the Evaluation:
    With little financial literacy, villagers may be aided by simple products like savings lockboxes to save money for large purchases and emergencies. The proposed intervention is based on the idea that individuals lack a safe place to save money temporarily and that they require a means to curb impulsivity. Prior research with the Tsimane’ has shown them to have very high rates of impulsivity. As a result, lockboxes that do not allow for easy access to these savings may improve the ability of clients to stall unnecessary consumption in the present, and consequently change savings behavior.
     
    The Tsimane’, a native Amazonian society living in communities near San Borja in the Department of Beni will be offered such a product. IPA is collaborating with CBIDSI (Centro Boliviano de Investigación y Desarrollo Socio Integral), a Bolivian nonprofit explicitly working with research and development among the Tsimane’.
     
    Details of the Intervention:
    The study includes 1,100 households in 70 villages randomly assigned to one of two treatment groups or a comparison group. Households in the first treatment group will receive a savings lockbox along with its key. Those in the second treatment group will receive the same lockboxes but will be required to go the nearest town (San Borja – from a few hours to two days from participating communities) to access the lockbox key from the office of CBIDSI.  The comparison group will not be offered any locked box product.
     
    To assess whether savings boxes in the possession of female household heads produces greater household saving and expenditures on children than saving boxes in the hands of male household heads, locked boxes will be randomly given to either female or male heads of households. The variation of key placement will allows us to evaluate whether possession of the key encourages impulsivity and altered expenditure patterns. Outcomes will be measured one year after the introduction of the lock boxes in a follow-up survey. The outcomes of interest include income (e.g. sales at markets, wage labor etc.), consumption (e.g. “large” purchases), savings activity (e.g. contributions to lockbox, traditional forms of savings, perceptions etc.), household well-being measures (e.g. anthropometric indicators of short-run nutritional status and household emergencies).
     
    Results and Policy Lessons:
    Results forthcoming.

     

    Ultra Poor Graduation Pilot in Yemen

    Can an intensive package of support lift the ultra poor out of extreme poverty to a more stable state? Graduation programs provide ultra-poor beneficiaries with a holistic set of services including: consumption support, new livelihoods (such as chickens or goats) provided as an asset transfer along with training on management of the assets, access to savings, and coaching visits over a 24-month period. IPA is conducting randomized evaluations of CGAP and Ford Foundation-sponsored graduation pilots in seven countries: IndiaPakistanHondurasPeruEthiopiaYemen, and Ghana.

    Policy Issue:

    Governments have often attempted to address the needs of the ultra poor by offering consumption support that is costly and offers no clear pathway out of food insecurity. The Graduation Approach, developed by BRAC in Bangladesh, recognizes that the ultra poor face an interrelated set of challenges: lack of skills, assets, and confidence, along with nutritional gaps and health shocks. The graduation approach incorporates a comprehensive package of services designed to ensure that households have the "breathing space" to focus on building new livelihoods, along with a secure place to grow their assets.

    This project is a part of a set of evaluations, in partnership with CGAP and the Ford Foundation, that intends to determine whether the model, pioneered in Bangladesh, is effective in a range of contexts.

    Context of the Evaluation:

    Located on the tip of the Arabian Peninsula, Yemen faces economic challenges. Food insecurity, aggravated by a scare supply of water, leaves 32 percent of the country undernourished [1].  Over 45 percent of the population lives under $2 US a day and about 17 percent lives under $ 1.25 US a day [2]. The Social Welfare Fund (SWF), the Yemeni welfare department, and the Social Fund for Development (SFD), a government-run development agency, have partnered with IPA to pilot the Graduation Model in three governorates of southern Yemen.

    Description of the Intervention:

    The Graduation Model in Yemen works in accord with the SWF welfare system.  All households in the sample frame come from the SWF welfare lists and receive an average quarterly stipend of 3,000 YR ($15 US).  The poorest households are identified using the Progress Out of Poverty Index and are verified as the poorest during SWF field officer visits.  These households are then randomly assigned to either a treatment or comparison group. Beneficiaries in treatment households receive training on an income generating activity such as, sewing, raising livestock, or petty trading.  As households’ income and food consumption stabilizes, beneficiaries are required to open a savings account at the local post office and are encouraged to reach a savings goal of 10,750 YR (about $ 50US) by the end of the two year program. In addition, these ultra poor households are monitored throughout the program with weekly visits from field officers and receive additional trainings on confidence building, social integration, and sanitation practices.

    Results and  Policy Lessons:

    Results forthcoming.

    For additional information on the Ultra Poor Graduation Pilots, click here.

     

    [1]World Bank, “Yemen Country Brief

    [2] The World Bank, “Yemen

    Ultra Poor Graduation Pilot in Ghana

    Can an intensive package of support lift the ultra poor out of extreme poverty to a more stable state? Graduation programs provide ultra-poor beneficiaries with a holistic set of services including: consumption support, new livelihoods (such as chickens or goats) provided as an asset transfer along with training on management of the assets, access to savings, and coaching visits over a 24-month period. IPA is conducting randomized evaluations of CGAP and Ford Foundation-sponsored graduation pilots in seven countries: IndiaPakistanHondurasPeruEthiopiaYemen, and Ghana.

    Policy Issue:

    Households well below the poverty-line face an interrelated set of challenges, each of which colludes to keep families in extreme poverty. These families are food insecure, do not have access to financial services, have few assets, savings, and inadequate access to healthcare, and often cannot afford education for children or need children to work. Without many opportunities or tools with which to change their situation, these households are vulnerable to shocks, such as bad harvests, and often dependent on charitable or government services for basic food support during lean seasons.

    Graduating from Ultra Poverty (GUP) uses the Ultra Poor Graduation model, developed by BRAC as part of its Targeting the Ultra Poor Program in Bangladesh, to confront extreme poverty by offering a holistic set of services. The model addresses the varied needs of households in extreme poverty by providinga sequenced set of services, including consumption support, productive asset transfer, livelihood training, savings services, and healthcare. This approach is based on the premise that beneficiaries require intensive support, beyond financial services, to make a sustainable change out of extreme poverty. In Ghana, the GUP evaluation provides an opportunity to measure the impact of the savings component of this program.

    Making weekly visits and providing a holistic bundle of services is costly. Evidence suggests that poor households, who are resource constrained, may be able to improve their economic welfare with improved financial products like savings accounts. The Savings Out of Ultra Poverty (SOUP) program in northern Ghana provides households with the opportunity to save money in a secure account through a weekly Susu collection program to build capital for future expenses, providing an opportunity to learn whether savings alone can make a difference for households in extreme poverty.

    By comparing the impact of the GUP and SOUP interventions, this study will help determine the impact of savings alone as well as savings when combined with a holistic package of services and which approach is more cost effective in improving household economic and social outcomes in the short and medium term.

    Context of the Evaluation:

    In Ghana, the GUP and SOUP programs are being implemented in 155 communities in the districts of Tamale Metro, East Mamprusi, and Bulsa in the Northern and Upper East Regions.  Presbyterian Agricultural Services (PAS), a local organization with experience delivering a wide range of services relating to agriculture, health, and saving, is implementing both programs with the support of IPA and in partnership with local rural banks. IPA is also conducting the impact evaluation.

    The GUP and SOUP programs serve women in the poorest households of selected communities. At the time of the baseline 84 percent of these women were illiterate, 18 percent had a household member with access to some sort of paid work, 66 percent lived in houses with mud or sand flooring, 93 percent had houses with thatched roofs and nearly all households relied primarily on subsistence farming.

    Description of Intervention & Evaluation:

    Households in selected communities were identified using a Participatory Wealth Ranking (PWR) process where villagers were asked to collectively rank the economic status of their community members.  Field officers confirmed the poverty status of eligible families and households. Communities were then randomly assigned to receive GUP, SOUP or to serve as comparison group with no intervention. Half of the eligible GUP households were also randomly assigned to receive weekly Susu collection as part of the package of services, and half of the SOUP households received a 50 percent match on any savings deposits made.   GUP and SOUP household receiving savings services are visited weekly by PAS field agents like “Susu” or “small small moneys” agents who collect savings for safe keeping.  PAS field agents deposit savings in household bank accounts and do not charge additional fees. Transactions are recorded for each household in a passbook provided by the bank.  Clients can withdraw money at any time by visiting a local bank branch.

    GUP households receive consumption support during the lean season, an asset to jump-start a new entrepreneurial venture, membership to the National Health Insurance Scheme and weekly training with support from field staff throughout the 2-year program. Households are also supported by community support committees, connected to health services, and receive assistance in opening an account a local bank.

    Households selected to receive the SOUP program receive savings accounts and weekly Susu collection services only – without all of the other components of the original Ultra Poor Graduation program. Half of the SOUP participants also receive a 50 percent match of all weekly savings deposits up to GHS 1.50 ($0.88 US) per week. There is no minimum or maximum to the amount that clients can save each week.

    By disaggregating the savings component from the rest of GUP program both by randomly offering savings accounts with the original model and creating a savings-only program, researchers will be able to examine the overall importance of savings accounts in assisting ultra poor households.  Furthermore, the matched savings intervention will allow analysis of the incentives on participant savings.  Specifically, researchers will be able to determine whether households are already saving the maximum amount possible, or if incentivizing savings can further increase deposits.

    Results:

    Results forthcoming.

    For additional information on the Ultra Poor Graduation Pilots, click here.

    Ultra Poor Graduation Pilot in Ethiopia

    Can an intensive package of support lift the ultra poor out of extreme poverty to a more stable state? Graduation programs provide ultra-poor beneficiaries with a holistic set of services including: consumption support, new livelihoods (such as chickens or goats) provided as an asset transfer along with training on management of the assets, access to savings, and coaching visits over a 24-month period. IPA is conducting randomized evaluations of CGAP and Ford Foundation-sponsored graduation pilots in seven countries: IndiaPakistanHondurasPeruEthiopiaYemen, and Ghana.

    Policy Issue:

    Governments have often attempted to address the needs of the ultra poor by offering consumption support that is costly and offers no clear pathway out of food insecurity. The Graduation Approach, developed by BRAC in Bangladesh, recognizes that the ultra poor face an interrelated set of challenges: lack of skills, assets, and confidence, along with nutritional gaps and health shocks. The graduation approach incorporates a comprehensive package of services designed to ensure that households have the "breathing space" to focus on building new livelihoods, along with a secure place to grow their assets.

    This project is a part of a set of evaluations, in partnership with CGAP and the Ford Foundation, that intends to determine whether the model, pioneered in Bangladesh, is effective in a range of contexts.

    Context of the Evaluation: 

    This study takes place in the Wukro district of the Tigray region of northern Ethiopia. The World Bank reports that 77% of the population lives on less than US$2 per dayand 39% of Ethiopians live at $1.25 per day[1]. Eighty-five percent of Ethiopian households are engaged in agriculture[2]. Droughts are common in Ethiopia and Tigray was the epicenter of the 1984-85 Ethiopian famine. The famine, which attracted worldwide media coverage, resulted in relief aid for the region from Live Aid and other efforts. 

    More recently, aid efforts have begun to shift from direct food support and food-for work programs to interventions designed to increase long-term prosperity. These interventions include credit for entrepreneurship, savings associations, and agricultural support, such as irrigation, water storage, and market linkages. The Ultra Poor Graduation Pilot targets the lower tier of those households who are already a part of the Productive Safety Net Programme (PSNP),the Government of Ethiopia’s program to address food security issues by offering guaranteed employment for up to fifteen days a month in return for cash or food handouts designed to meet households’ basic nutritional needs. 

    Description of Intervention:

    Five hundred treatment households in ten villages in Wukro district initially receive consumption support transferred through PSNP for six months.Once households’ food consumption stabilizes, they receive individual savings accounts at DECSI, a microfinance institution operating in the region, as well as business training. Later on, participants receive a livelihood asset chosen from a preselected list of options: raising small ruminants, cattle fattening, petty trade or beekeeping, to help jump start a new economic activity. Participants are monitored throughout the process – they receive home visits to help boost confidence and build expertise, and are provided with access to social and health services.

    Results:

    Results forthcoming.

    For additional information on the Ultra Poor Graduation Pilots, click here.

     


    [1] The World Bank, “Data: Ethiopia” 

    [2] CIA, “World Factbook: Ethiopia Economy” 

    Ultra Poor Graduation Pilot in Pakistan

    Can an intensive package of support lift the ultra poor out of extreme poverty to a more stable state? Graduation programs provide ultra-poor beneficiaries with a holistic set of services including: consumption support, new livelihoods (such as chickens or goats) provided as an asset transfer along with training on management of the assets, access to savings, and coaching visits over a 24-month period. IPA is conducting randomized evaluations of CGAP and Ford Foundation-sponsored graduation pilots in seven countries: IndiaPakistanHondurasPeruEthiopiaYemen, and Ghana.

    Policy Issue: 

    Governments have often attempted to address the needs of the ultra poor by offering consumption support that is costly and offers no clear pathway out of food insecurity. The Graduation Approach, developed by BRAC in Bangladesh, recognizes that the ultra poor face an interrelated set of challenges: lack of skills, assets, and confidence, along with nutritional gaps and health shocks. The graduation approach incorporates a comprehensive package of services designed to ensure that households have the "breathing space" to focus on building new livelihoods, along with a secure place to grow their assets.

    This project is a part of a set of evaluations, in partnership with CGAP and the Ford Foundation, that intends to determine whether the model, pioneered in Bangladesh, is effective in a range of contexts.

     
    Context of the Evaluation:

    Poverty in Pakistan is a growing concern—almost one third of the county’s 170 million inhabitants live in poverty, an increase of almost 13% since the1990s,[i] and there are currently 3.2 million people displaced by wars[ii]. Pakistan is home to a large feudal landholding system, where numerous poor tenants are indebted to landowners. Lacking access to formal credit, poor tenants are bonded to their impoverished condition and are often exploited for their labor.

    This study takes place in the Coastal Sindh region of Pakistan. Four NGOs, Aga Khan Planning and Building Services Pakistan (AKPBSP), Badin Rural Development Society (BRDS), Indus Earth Trust (IET), Sindh Agricultural and Forestry Workers Coordinating Organization (SAFWCO), have partnered with IPA and the Pakistan Poverty Alleviation Fund to implement the Ultra Poor Graduation Pilot to assist these vulnerable households.

    Details of the Intervention:

    Eligible households are identified using a Participatory Wealth Ranking (PWR), a method that engages villagers in creating an economic ranking of all households in a community.  After the economic status of eligible families is verified, households are randomly assigned to either a treatment or comparison group. The treatment beneficiaries receive a monthly stipend of Rs. 1000 ($12 US) for the first year to stabilize consumption.  Next, households choose an asset and begin livelihood training.  Examples of livelihood activities include embroidery, raising livestock, fishing, and carpentry.  Beneficiaries are encouraged to save money at home, in savings boxes, or with Rotating Savings and Credit Associations (ROSCAs) that pool money and periodically distribute group savings to each member.  Lady Health Visitors working with some of the partners provide health services to participating households. 

    Results:

    Forthcoming.

    For additional information on Ultra Poor Graduation Pilots, click here.

     

    [i] AusAID, Australian Government, “Pakistan

    [ii] Hani, Faez and Seri Begawan, Bandar, “3.2m Pakistanis displaced by war against Taliban need urgent aid,” The Brunei Times

    Moving Beyond Conditional Cash Transfers in the Dominican Republic

    Conditional cash transfers have proven effective as incentives for the extreme poor to visit a health clinic or send their children to school. But are such programs sustainable? If the cash assistance is taken away, will families find themselves back where they started before the program? In this study, researchers evaluate if financial education and business training can help recipients graduate from a conditional cash transfer program, and what type of training is most beneficial.

    Policy Issue:
    Cash transfer programs are increasingly common across developing countries. These programs provide income support to those living in extreme poverty, and in the case of conditional cash transfer (CCT) programs, provide incentives for parents to invest in the human capital of their children by making the transfers conditional on certain behaviors, like attending school or visiting a health clinic. Despite their established benefits in terms of improving health and educational achievement, many policymakers and development practitioners remain concerned about the extent to which households may become dependent on cash transfers to maintain their living standards. Even with greater access to healthcare and education, it can be difficult for beneficiary households to manage their personal finances, find and maintain a stable job, or start a new business. It is not clear whether families will revert to pre-program poverty levels when the transfers are no longer provided, or whether the transfers enable more permanent changes in household and business finances, ultimately allowing beneficiaries to graduate from the program.
     
    Context of the Evaluation:
    Solidaridad is a CCT program in the Dominican Republic that provides cash transfers to poor households if they invest more in education, health, and nutrition. Eligible families receive around US$75 every three months if they comply with certain conditions, including the school enrollment and attendance of all household children, and regular health check-ups for children under the age of five years old. Approximately 20 percent of the Dominican population lives in moderate or extreme poverty, and are eligible to receive trimonthly transfers from the program.[1] The beneficiaries receive these transfers via a debit card to be used to purchase basic food products at authorized stores, and meet every three months in community groups (núcleos) to receive training in nutrition and preventive health. However, Solidaridad does not currently have a graduation strategy to encourage beneficiaries to improve their household financial management and develop stable income sources from jobs or small business creation.
     
    Description of the Intervention:
    Researchers are using a randomized evaluation to assess whether providing financial literacy and business training to CCT beneficiaries can help them graduate from the program, and what type of training is most beneficial.
    Two hundred and forty núcleos, with a total of 3,600 individuals, will be selected from government administrative data and randomly assigned to either the treatment or comparison group. All members of the treatment group will receive financial literacy training intended to improve household financial management skills. In addition, núcleos in the treatment group will also be randomly selected to receive one or more of the following:
    • Professional vs. peer trainers. Of the 120 núcleos in the treatment group, half will receive financial literacy training from professional trainers, while the other half will receive the training from their peers.
    • Business vs. job skills training.In addition to the financial literacy training, half of the núcleos in this treatment group will receive an additional training session on financial management for businesses, while the other half will receive additional training on job skills (finding, acquiring, and maintaining employment).
    • Budgeting notebooks. Within each núcleo, a random subset of beneficiaries will be selected to receive notebooks that can be used to maintain household and/or business budgets to test whether the notebooks increases the impact of the training.
    • Access to formal financial services. Of the beneficiaries who already own a business and are interested in and eligible to receive a loan, a random subset will be offered a loan and an accompanying savings account from a local commercial bank.
    Key outcome measures include knowledge and management of household and business finances, household and business assets, and the employment status and conditions of household members.
     
    Results and Policy Lessons:
     
    Results forthcoming

    [1]Government of the Dominican Republic. “Programa Solidaridad.” http://www.solidaridad.gov.do/

    Starting a Lifetime of Saving: Teaching the Practice of Saving to Ugandan Youth

    Improving financial literacy and access to bank accounts may help youth save, allowing them to meet current financial needs and invest in their futures. In Uganda, researchers evaluated whether offering financial education or group savings accounts to church-based youth groups increased savings. They found that total savings and income increased among youth offered financial education, group savings accounts, or both education and group accounts.

    Policy Issue:

    Promoting financial literacy and providing access to bank accounts have become popular approaches to help the poor save. Increased savings may help individuals meet day-to-day financial demands and invest in their futures. Furthermore, increasing the savings rate in the general population may help promote large-scale changes in a country’s economy by allowing increased investment in productive resources. In order to maximize the benefits of increased savings at both the individual and country level, it may be most effective to encourage youth to save. Young people may be more likely to adopt new habits, and they have many working years ahead of them. A growing body of literature investigates whether either financial education or bank access affect savings behavior. 

     
    Context of the Evaluation:

    Uganda has a very young population: in 2006, 52 percent of the country’s population was under 15 years old and 29 percent of the country’s adult population was between 15 and 34.1 In addition, Uganda has extremely low savings rates, even relative to its neighbors. Between 2001 and 2003, the average savings rate among Ugandan households was 5.2 percent, compared with an average rate of 12.7 percent in neighboring Kenya.2

    Researchers partnered with the Foundation for International Community Assistance (FINCA) and the Church of Uganda in this evaluation. FINCA, whose mission is to provide financial services to the world’s lowest-income entrepreneurs, has worked in Uganda since 1992. The Church of Uganda is an Anglican church, representing the second largest religious group in the country. As of the 2002 census, 36 percent of the population considered themselves affiliated with the church. The Church maintains a large network of youth fellowship groups, based at village churches around the country. The youth groups participating in this study had an average of 40 members. The average age was 24.5 and 40 percent of members were female.

     
    Details of the Intervention:

    Researchers evaluated whether offering financial education or group savings accounts to Ugandan youth groups increased savings. The study involved 240 Church of Uganda youth groups, which were randomly assigned to receive financial education, a group savings account, both financial education and a savings account, or neither intervention. There were 60 youth groups in each arm of the study.

    The curriculum for the financial education intervention was designed in partnership with Straight Talk Foundation and Freedom from Hunger. The ten-session, fifteen-hour curriculum taught concepts and skills for improving savings behavior, including role-playing the differences between saving and borrowing to achieve a goal, how to keep a budget, and strategies for successfully discussing sensitive topics around money.

    Researchers partnered with FINCA to design a group savings account without fees and with simple account-opening procedures, which minimized common barriers to opening accounts. Each club had only one account and was responsible for maintaining a ledger with individual members’ savings. Clubs were also required to make a deposit within thirty days of opening the account and to maintain a minimum balance of 50,000 UGX (US$20).

     
    Results and Policy Lessons:

    Financial literacy: Members of youth groups receiving financial education had higher levels of financial knowledge, awareness, and numeracy. Youth in groups receiving financial education only scored 0.04 standard deviations higher than the comparison group on an index combining questions relating to financial literacy. Youth in groups receiving both financial education and group accounts scored 0.06 standard deviations higher than the comparison group. Youth in groups receiving account access only did not score any better than the comparison group.

    Bank savings: Using administrative bank data on the group accounts offered in the intervention, researchers found that offering financial education in addition to account access increased savings more than offering the account alone. Averaging across groups receiving account access only and groups receiving account access plus financial education, only 14 percent of members used the account. However, those who did use the accounts saved non-trivial amounts: an average of 15,000 UGX  (US$6) in the account-only group and an additional 4,000-7,000 UGX (US$1.60-2.80) among those who also received financial education.

    Total savings: All three interventions designed to promote savings increased participants’ total savings. This measure included saving by storing at home, by having another person hold the money, or by buying durable goods that could later be sold, in addition to savings held at a formal bank. In contrast to the administrative bank data, these results did not show that financial education and account access work together to promote savings, but rather that each approach can encourage increased savings on its own.

    Income: Individuals in all three treatment groups reported earning 10-15 percent more income than individuals in the comparison group. However, researchers were unable to determine whether this effect resulted from individuals working more in order to increase their savings or from individuals using savings to make investments that generated income.

    Are financial education and formal savings accounts complements or substitutes in the medium to long-term? Do the impacts on behavior and income persist over time? What are the mechanisms underlying the increase in earned income? To answer these questions, a follow-up of this evaluation three years after the commencement of the intervention is currently being conducted by IPA in Uganda, under the Financial Capability Research Fund. Results forthcoming.

     


    [1]Uganda Bureau of Statistics (UBOS) and Macro International Inc. 2007. Uganda Demographic and Health Survey 2006. Calverton, Maryland, USA: UBOS and Macro International Inc. Page 11.

    [2] Bank of Uganda research department, Sept. 14, 2005.  Found in “Savings Habits, Needs and Priorities in Rural Uganda.” Prepared by Richard Pelrine, Olive Kabatalya. Rural SPEED and Chemonics International.  Produced by USAID, September, 2005. 

    Ultra Poor Graduation Pilot in India

    Can an intensive package of support lift the ultra poor out of extreme poverty to a more stable state? Graduation programs provide ultra-poor beneficiaries with a holistic set of services including: consumption support, new livelihoods such as cattle or goats provided as an asset transfer along with training on  management of the assets, access to savings, and coaching visits over a 18-24 month period. IPA is conducting randomized evaluations of CGAP and Ford Foundation-sponsored graduation pilots in seven countries: IndiaPakistanHondurasPeruEthiopiaYemen, and Ghana.

    Policy Issue: 

    Governments have often attempted to address the needs of the ultra poor by offering consumption support that is costly and offers no clear pathway out of food insecurity. The Graduation Approach, developed by BRAC in Bangladesh, recognizes that the ultra poor face an interrelated set of challenges: lack of skills, assets, and confidence, along with nutritional gaps and health shocks. The graduation approach incorporates a comprehensive package of services designed to ensure that households have the "breathing space" to focus on building new livelihoods, along with a secure place to grow their assets.

    This project is a part of a set of evaluations, in partnership with CGAP and the Ford Foundation, that intends to determine whether the model, pioneered in Bangladesh, is effective in a range of contexts.

    Context of the Evaluation: 

    Over 30% of West Bengal’s 82 million residents are believed to live below the poverty line, and an estimated 18% of the wealthiest rural citizens actually hold “below poverty line” cards. Murshidabad is one of the poorest districts of West Bengal, ranked 15 out of 17 in terms of the Human Development Index. Over 70% of the population of West Bengal lives in rural areas.

    Details of the Intervention: 

    Graduation programs incorporate targeting methods to identify the ultra poor. This is done by selecting a poor target area, then ultra poor housholds are identified through social mapping and wealth ranking using Participatory Rural Appraisals (PRAs) in each of the target villages. After a second verification of selected participants, a baseline survey was conducted among eligible households, who were randomly divided into treatment and control groups. Participants received a grant of approximately US$100 to purchase a productive asset of their choice. These assets included both farm and non-farm assets, although livestock, such as cows or goats, was the most popular selection. Households were also given access to a fund for health expenditures. Bandhan staff met with the selected households on a weekly basis for 18 months to check their status and provide supplemental business-skills training. 

    Upon completion of the program, all households were surveyed to determine program impacts. One year later, a second follow up survey was conducted to evaluate the long-term impacts of the graduation program. Measured outcomes included income, assets, school attendance of children, health, and food security.

    The Impact of Health Insurance Education on Enrollment in Ghana’s National Health Insurance Scheme

    Government-subsidized health care is seen as a useful tool in tackling the health challenges in sub-Saharan Africa, but for it to work, people have to enroll in the program. Ghana offers universal health care, but only about a third of the population is enrolled. Some evidence suggested education about the insurance program would boost enrollment. However, a randomized evaluation in northern Ghana determined that education was not the barrier.

    Policy Issue
    Health outcomes in sub-Saharan Africa are on average very poor. While the region has 11 percent of the world’s population, it accounts for half of the deaths of children under five, has the highest maternal mortality rate and is disproportionately impacted by HIV/AIDS, tuberculosis, and malaria.[1]  Many people, especially in rural areas, lack access to basic health care services. To help tackle the problem, some governments are providing low-cost public insurance options. However, getting the population enrolled in such programs has been a challenge in some countries. One theory was that low enrollment was a result of lack of knowledge and understanding of health insurance, and that health insurance education would lead to higher enrollment rates.
     
    Context of the Evaluation
    Although Ghana's National Health Insurance Scheme has offered low-cost insurance since 2003, a large share of the population remains uncovered. As of 2010, the National Health Insurance Authority estimated that only 34 percent of the population was actively enrolled in health insurance. Coverage rates are especially low in rural areas, including Ghana's Northern Region.
     
    Preliminary qualitative research from international development organization Freedom From Hunger suggested that one reason for low enrollment was lack of knowledge and understanding of health insurance. Freedom From Hunger and IPA partnered to evaluate the impact of an education program developed by Freedom From Hunger on enrollment rates. Freedom From Hunger and IPA then partnered with a local microfinance institution Sinapi Aba Trust to administer the health insurance education program to Sinapi Aba Trust’s clients in both urban and rural areas in the Northern Region, Ghana, specifically in Bole, Salaga, Tamale, and Walewale.
     
    Details of the Intervention
    To understand if health insurance education leads to higher enrollment rates, researchers carried out a randomized evaluation with survey data from 1,500 Sinapi Aba Trust microfinance group clients. Credit officers with Sinapi Aba Trust administered the education program to microfinance groups after being trained by Freedom From Hunger.
     
    Three hundred microfinance groups were randomly selected from among Sinapi Aba Trust's client groups. The groups were stratified by branch, depending on whether the group was urban or rural, and whether initial insurance enrollment for the group was estimated to be high or low. Of those 300 groups, 120 were randomly assigned to the comparison group, while 45 were assigned to each of four treatment groups . All of the treatment groups received education covering planning for health expenses, the definition of health insurance and its benefits, and how to sign up for Ghana's National Health Insurance Scheme.
     
    The four treatment groups were as follows:
     
    Short session education: These credit groups received education through a series of six 30-minute sessions over 12 weeks.
     
    Short session education and reminder session: These credit groups were also given education through a series of six 30-minute sessions over 12 weeks, but with a session one year later that reviewed the material and reminded clients that to continue to have access to health insurance, they needed to enroll each year.
     
    Consolidated session education: These credit groups covered the same material as the “short session” groups but in one 2-hour session.
     
    Consolidated session education and reminder session:These credit groups covered the same material as the “short session” groups but in one 2-hour session, and with a reminder session one year later.
     
    A fifth, comparison group did not receive any education program.
     
    IPA conducted baseline, midline, and endline surveys with 1,500 respondents.  Within each client group, five individuals were randomly selected to be included in the study data. Sinapi Aba Trust credit officers administered post-education knowledge tests with a small subset of the sample. IPA also conducted a qualitative endline survey with a small a subset of the sample.
     
    Results and Policy Lessons
    Results indicated that individuals who received health insurance education were no more likely to enroll in health insurance than individuals in the control group.[2]
    While education may have had some impact on knowledge of insurance, the effect was short-lived. Notably, attitudes towards insurance were universally favorable, and knowledge of insurance generally high, regardless of treatment status. This suggests that knowledge was not a major barrier to health insurance enrollment in Ghana. Follow-up interviews suggest that the convenience of registration, clients following through on stated intent to enroll, and the timing of making the premium payments are more common challenges for enrollment. In environments where knowledge and enrollment are low, educational programs may, therefore, have more impact.
     
    Enrollment increased for all of the studied groups, including the comparison group that received no treatment, at a higher rate than the general population. It is possible that the repeated surveys, along with the treatment activities, might have served as “touch points” that prompted clients to take action to register or enroll in insurance.
     
    In sum, this study joins a growing body of evidence finding that in many contexts, the impact of education programs on health insurance enrollment is limited, especially where a program is established and generally well-known. This research suggests that efforts to promote enrollment should focus on other barriers to enrollment, such as convenience, timing of costs, and following through with intent to enroll. 
     
     
    [1]International Finance Corporation, “Health and Education in Africa.”
     
    [2]Schultz, Elizabeth, Metcalfe, Marcia, and Gray, Bobbi. “The Impact of Health Insurance Education on Enrollment of Microfinance Institution Clients in the Ghana National Health Insurance Scheme, Northern Ghana.” Microinsurance Innovation Facility, ILO. No. 33, May 2013. 
     

     

     
    Raymond Guiteras

    Evaluating the Impact of Business Registration in Malawi

    Millions of people in developing countries work in the informal sector, and in many countries there are significant barriers to registering one’s business and entering the formal sector. Researchers are carrying out a randomized evaluation in Malawi to measure the impact of formalization on the business performance of micro-, small and medium enterprises (MSMEs).

    Policy Issue:

    Businesses in the informal sector typically grow more slowly, have poorer access to credit, and employ fewer workers than those in the formal sector.Household and business resources also tend to be strongly intertwined for those in the informal sector, resulting in the depletion of working capital. Bringing more businesses into the formal sector, which begins with business registration, may have numerous benefits, such as the ability to open a business bank account, acquire an export license, access business bank loans, and become eligible for government programs. This study assesseswhether becoming formal improves enterprise performance. It aims to determine if the benefits of business registration outweigh the costs, if both male and female-owned enterprises gain equally from registration, and if business bank accounts add value to formalization by helping business owners separate business from household money.

    Context of the Evaluation:

    In Malawi, the informal sector represents 93 percent of the non-farm small-scale enterprises.[1] Businesses in Malawi have faced significant barriers to formalization in the past. Malawi is streamlining its registration process to increase the registration rate amongst MSMEs. The Business Registration Impact Evaluation (BRIE) is a direct response to the interest of the Government of Malawi in evaluating whether or not business registration improves business performance. If a positive impact is detected in this study, the government plans to use the results of this study to promote registration. If no impact is identified, it plans to identify the corresponding bottlenecks that affect enterprise performance.

    Details of the Intervention:

    This study evaluates the impact of formalization—through business registration, tax registration, and business savings accounts—on enterprise performance.Participants consist of 3,000 informal MSMEs located in Blantyre and Lilongwe, the major commercial cities in Malawi. The study is being conducted over a four year period.

    All 2,250 firms in the treatment groups are being offered free registration with the Department of the Registrar General (DRG) – which is the main step to firm formalization in Malawi. A random group of 300 firms is also being offered to register for taxes and obtain a tax identification number from the Malawian Tax Authority, allowing the researchers to test the additional value, if any, of this step in the formalization process. The remaining 1,200 firms in the treatment group were invited to information sessions by a local bank on the benefits of separating business from household money and offered business savings accounts. In short, the firms were randomly assigned to one of the following groups:

    1)    Offered free business registration only (750 firms)

    2)    Offered free business registration and tax registration (300 firms)

    3)    Offered free business registration, invited to information sessions, and offered business savings accounts (1,200 firms)

    4)    Comparison group – no intervention (750 firms)

    The team is collecting extensive data over a four-year period to estimate the impact of the various interventions on business expansion, access to finance, and productivity of MSMEs. The outcomes of interest include measures of firms’ financial performance, investments in the business, survival rates, number and skill composition of employees, access to finance, number of customers, and harassment levels.

     
    Results and Policy Lessons:

    Results forthcoming.

    Unconditional Cash Grants for People with HIV/AIDS in Uganda

    Research has shown that HIV/AIDS impacts not only the health of infected individuals, but also their financial security, and the financial security of their households, often aggravating existing poverty. Researchers will introduce unconditional cash grants, coupled with financial planning sessions, to people living with HIV/AIDS to evaluate the impact on the health and financial security outcomes of participants.

    Policy Issue:

    Evidence indicates that HIV/AIDS affects not only infected individuals, but also the health and wealth of their households. When a household member is affected by HIV/AIDS, it can exacerbate existing poverty by hindering productivity and imposing additional costs on households, such as health care and funeral costs. The link between HIV/AIDS and poverty has caused some researchers and policymakers in recent years to examine financial assistance as a potential tool in the fight against AIDS.1 This study sheds light on this relationship by evaluating the impact of providing unconditional cash grants, coupled with financial planning sessions, to people living with HIV/AIDS.

    Context of the Evaluation:

    In Uganda, approximately 1.5 million people, or 7.2 percent of the population, are living with HIV.2 The high infection rate is coupled with high rates of poverty, especially in rural areas. In 2012, Uganda ranked 161st among 187 countries on the United Nations Development Program’s Human Development Index.

    The AIDS Support Organization(TASO), the implementing partner in this study, is a Ugandan NGO founded in 1987. TASO has provided HIV/AIDS services to over 200,000 individuals since its inception, and now has eleven service centers spread across Uganda.TASO is looking for new evidence-based ways of supporting their clients, and is prepared to expand microfinance and grant opportunities across Uganda if there is compelling evidence that these programs improve patients’ lives.

    Details of the Intervention:

    To evaluate the impact of unconditional cash grants on the health and financial security outcomes of people living with HIV/AIDS, researchers will carry out a randomized evaluation of a cash grant program, jointly designed by researchers and TASO, and administered by TASO. The unconditional cash grant program will provide cash transfers of 350,000 Ugandan shillings (approximately US$138), with no strings attached, to HIV/AIDS positive TASO clients.

    Approximately 2,200 HIV/AIDS positive TASO clients, ages 18-60 will be randomly divided into one of four groups: i) a treatment group that will receive cash transfers with no accompanying instructions on how the money should be spent, ii) a treatment group that will receive cash transfers plus financial counseling, iii) a treatment group that will be told they will receive cash transfer after one year, and iv) a comparison group that will not receive any intervention. The third treatment group will enable researchers to see how participants’ financial status and planning changes, or if it changes at all, when they know they will receive money in one year.

    The quarter of clients that receive both cash grants and financial counseling will meet with a financial counselor twice at a TASO center, with six days between the meetings, and then will receive the grant at the end of the second one-hour meeting. At the meetings, the counselors will help clients think through and plan for the grant. Discussions will focus on topics such as setting realistic expectations, prioritizing expenses, handling family members’ expectations of the grant, and resisting temptations. Furthermore, the counselors will go into detail about income generating activities, loans and/or saving, depending on the client’s particular interests.

     
    Results and Policy Lessons:

    Results forthcoming.

     


    [1] Sengupta, Rajdeep, and Craig P. Aubuchon. "The microfinance revolution: An overview." Federal Reserve Bank of St. Louis Review 90, no. January/February 2008 (2008).

    [2] UNAIDS. Country Report Uganda. 2012. Available at: http://www.unaids.org/en/regionscountries/countries/uganda/

    Informative vs. Persuasive Advertising of Savings Products

    Policy Issue:

    Many argue that increasing financial literacy among poor households would increase usage of financial products, and savings products in particular.  However, this theory raises an immediate question: if financial literacy increases take-up of savings products, why don’t banks and microfinance institutions include financial literacy materials in their advertising?   One explanation for this relative lack of “informational advertising” or use of financial literacy materials is that banks cannot capture all of the increase in savings product use from the advertising (i.e. there are spillovers).  The informative advertising may make customers more likely to use savings products in general from any firm, thus the bank conducting the marketing may not benefit.  Another method, referred to as “persuasive advertising” that tries to convince the customer that a particular firm is superior may be a more effective means of promoting a particular bank’s products.   This study assesses the impact of both informative and persuasive advertising to better understand the role of financial literacy in savings product take-up.

    Context of the Evaluation:

    This project takes place in Cagayan de Oro City, a sprawling city of more than 550,000 people in Northern Mindanao, Philippines.  Study areas are urban or peri-urban, including informal settlements with tenuous land rights and areas that are frequently affected by flooding.  The majority of respondents live below the poverty line, and, during the baseline, only half reported having a household member with salaried employment.  Common occupations in these areas include construction work, driving jeepneys, tricycles, or pedicabs, and operating small neighborhood stores or eateries.  Nearly half of the respondents surveyed reported never having saved with a formal financial institution, though a majority said they have saved at home, and some through informal savings mechanisms. At the time of the project launch, commitment savings accounts were available at both partner banks, Green Bank and First Valley Bank, but few respondents reported using the bank for any purpose.  Green Bank offers the SEED Commitment Savings Account, while First Valley Bank offers the Gihandom Savings Account. 

    Description of Intervention:

    This evaluation assesses the impact of two types of advertising campaigns on savings product take-up. First Valley Bank and Green Bank of Caraga hired teams of marketers to implement a new advertising campaign promoting the banks’ commitment savings products.

    The target sample, households in 12 barangays close to both partner banks (within two regular-priced rides using standard local transportation, 14 pesos or approx. 30 US cents) were given a baseline survey. This survey captured information about basic demographics, work experience and income levels, poverty level (using the PPI), cognitive ability, thoughts on advertising, and previous experience with formal financial institutions and saving.   All households were randomly assigned to one of three treatment groups or a comparison group.

    Marketers from both banks distributed two types of fliers advertising the bank’s commitment savings product to households in the treatment groups. Informative fliers contained basic financial literacy information that highlighted the costs of borrowing versus saving, while persuasive fliers emphasized the quality and trustworthiness of a particular bank.  Each treatment group received one flier from each bank in a random order: both informative, both persuasive, or mixed (one informative and one persuasive or vice-versa).  All fliers were bright and colorful and had a map of the bank's location on the back and noted the four key features of the savings product: 2% interest rate , opening/minimum balance of 100 pesos, free lockbox for savings (paid for by IPA), and goal-setting feature (date or amount restrictions on withdrawal).  IPA worked with the banks to refine product terms and conditions and ensure equivalency on a number of key features, terms, and fees so that no significant variation existed between the two banks’ products.

    A few weeks later, marketers from both banks returned to all households reached in the baseline, including comparison households, and offered to help open savings accounts.  To reduce the non-financial barriers to savings that respondents might face, marketers took ID photos for respondents and made copies of other documents required to open accounts.  Marketers also worked with respondents to help set a savings goal.  At the end of each day, marketers submitted completed application packets and initial deposits for processing by the bank.  When accounts had been processed, marketers returned to households to hand over lockboxes and passbooks and answer any additional question the clients may have had about their new accounts.  All households were visited by representatives from both banks in a random order to eliminate any first-mover effect.

    Results and Policy Lessons:

    Results forthcoming. 

    Network Effects between Small & Medium Enterprises in Uganda

    Many governments and organizations use finance and management training as a tool to promote small and medium enterprise growth in developing countries, but it is not clear if or how information from these trainings is shared across SMEs operating in the same area.  Researchers are evaluating the extent to which firms share information acquired in business skills training programs to assess whether networks of small businesses act as partners or competitors, and by extension, whether such training programs could be redesigned to be more cost-effective.

    Policy Issue:

    Small and medium enterprises (SMEs) are thought to be an important source of innovation and employment due to their flexibility in responding to new market opportunities and their potential for growth. While an increasing amount of research is focusing on eliminating barriers to SME growth, little is understood about how these firms interact with each other in a market setting. While firms are often assumed to compete with each other, some hypothesize that firms in developing countries tend to collaborate in order to insure themselves against failures in the credit, labor, and input markets. Understanding how firms interact with each other could help governments and other organizations improve training programs designed to support SME growth and save money.

    If businesses act as partners rather than competitors, then they may share knowledge gained in trainings, and it might be possible to scale back training programs with few adverse effects. Funds saved could be used to expand trainings to other areas or could be diverted to other interventions. This study seeks to understand the network dynamics of small firms by observing the dispersion of information from two types of trainings through the network. One training will help firms develop improved technical skills, which other firms can easily copy. A second training will focus on finance and management practices, which are not easy for other business to emulate, unless the training participants choose to share the information. If firms work together as partners, trying to maximize profit as a whole, there should be little difference in the sharing of technical and financial skills. However, if firms are competing, then technical knowledge will likely be dispersed more widely than financial knowledge.

    Context of the Evaluation:

    In Uganda, small-scale business owners such as shoemakers, caterers, and metal fabricators constitute about 13 percent of employment and absorb 30 percent of new entrants into the labor market. Estimates suggest that nearly 40 percent of Ugandan households own and operate a non-farm household enterprise, and the sector has grown at an average annual rate of 8 percent over the last ten years. Despite this growth, most people operating in this sector do not have formal technical or financial training; instead they rely on old and sometime obsolete production methods and rarely maintain financial or transactional records. Productivity in the sector is low and nearly 50 percent of businesses fail in their first three years of operation.1

    Details of the Intervention:

    Researchers partnered with Katwe Small Scale Industries Association (KASSIDA), an association comprised of members from nine informal industry sectors, to deliver two training programs to small-scale business owners and workers operating on the outskirts of Kampala, Uganda.

    One training module was designed to help firms develop improved technical skills, which other firms can easily copy. Participants practiced more efficient, sector-specific production techniques in model workshops. Sessions lasted for 2-3 hours per day and continued for 60 days.

    A second training module focused on finance and management practices, which are not easy for other business to emulate, unless the training participants choose to share the information. This training covered marketing and customer service, costing and pricing, business planning, bookkeeping, and separation of business and personal life. The business management training was offered to workshop owners only and took place over a period of three months.

    Businesses were clustered so that a group of businesses either received no training or both trainings. Businesses operating within 20 meters of each other were considered a cluster. A total of 228 clusters were identified, and within this sample, each group was matched with another similar cluster. One cluster in the pair was then randomly allocated to receive both trainings and the other received no training.

    Surveys to track information transmission and business outcomes such as sales, profit, and number of employees, were completed six, twelve and 20 months after the end of the training.

    Results and Policy Lessons:

    Project ongoing, results forthcoming. 



    [1] Uganda National Household Survey (2002/3 and 2005/6).

     

    The Impact of Credit Constraints on Exporting Firms

    Improving access to credit is thought to help small- and medium- sized businesses participate in international trade, but existing evidence on the link between financing and exportation is mixed. This study evaluated the impact of credit constraints on exporting firms by examining two policy changes in India—one in 1998 that extended subsidized credit to businesses, and another in 2000 that revoked the subsidized credit for a portion of these businesses. Results showed that the 1998 credit expansion increased borrowing and improved export earnings for newly eligible businesses, and that businesses continued to borrow and earn more from exporting even after the subsidized credit was revoked.

    Policy Issue:

    Exportation is widely considered to be an important way for small and medium enterprises (SMEs) in developing countries to expand their markets, scale up production, acquire new technology, and mitigate risk. In many developing countries, the banking sector tends to under-lend to SMEs, meaning that businesses would be able to make additional profit if they could access more credit. This financing constraint is thought to be a possible barrier to increased exportation, as well as a constraint to SME growth in general. For this reason, governments in some developing countries work to promote SME financing through various reforms and interventions. However, there is mixed evidence on the link between access to finance and the propensity to export.[1] This study aims to shed light on the causal relationship between financing and exportation by looking at the impact of changes in the availability of subsidized loans to SMEs in India.

    Note: This study is not a randomized controlled trial.

     
    Context of the Evaluation:

    The banking sector in India is largely dominated by public sector banks, which are corporate banks in which the government is the majority shareholder. Seventy eight percent of total deposits are collected by public banks, and 77 percent of total loans and advances are made by these banks. Until 1997, the Reserve Bank of India intensely regulated the amount of financing offered by banks, and they continue to be involved in determining bank lending policies. These rigid banking policies are thought to be one of the reasons that banks in India lend less than the amount that businesses would use to maximize profit.

    In addition to the rigid policies discussed above, two other characteristics of the Indian banking sector are thought to cause under-lending. First, banks in India are slow to respond to changes in lending patterns, so banks will not necessarily start lending to certain types of firms even if recent data suggests that it would be profitable. Second, because the public sector is the majority shareholder of most banks in India, bank employees are considered public servants, and are therefore held to strict anti-corruption laws. Research shows that the fear of being prosecuted significantly reduces lending.[2]

    To promote lending to the agriculture sector and small scale industries, sectors that the Indian government considers priorities, all banks in India are required to lend 40 percent of their credit at a subsidized rate to these sectors. Prior to 1998, small-scale industries were considered firms with investments below 6.5 million rupees. In January 1998, the cut off was raised, making larger firms suddenly eligible for subsidized credit. In January 2000, the 1998 reform was partially undone when the cut off was lowered again.

     
    Details of the Intervention:

    To measure the impact of increasing the amount of available credit on SMEs, researchers used the policy changes in 1998 and 2000 as the basis for a natural experiment. Data from the Center for Monitoring Indian Economy on 1000 firms in the manufacturing sector in India was used to assess changes in the international trade habits of exporting businesses when they were made eligible for credit subsidies and when those subsidies were revoked.

    For the years 1999 and 2000, all new firms that became eligible for the subsidy formed the treatment group, while from 2001 to 2006 all firms that lost their eligibility formed the treatment group. Firms that were not affected by these policy changes were considered the comparison group in this evaluation.

     
    Results and Policy Lessons:

    Results show that the firms affected by the 1998 policy change were credit constrained. The rate of short-term bank credit for newly eligible firms increased by 18 percent and total bank borrowing increased by about 20 percent. Borrowing from other sources also increased, meaning that firms were taking advantage of more credit rather than substituting other sources of credit with subsidized credit.

    The availability of credit for newly eligible firms led to a 22 percent increase in export earnings for these businesses. This supports the view that increased access to credit can cause higher levels of exportation. The study further shows that there is a positive relationship between exportation and firm growth and financial health.

    The policy reversal in 2000 had little to no effect on bank borrowing and export earnings for the firms whose eligibility was revoked. This supports the view that the Indian banking sector tends to under-lend, since the increased credit access granted to the newly eligible firms in 1998 allowed these firms to grow rapidly. Given the positive performance of these firms, the banks had no reason to reduce their credit limit when the policy was reversed in 2000 and firms continued to borrow at the market interest rate.

    It is important to note that while the 1998 policy change increased borrowing for newly eligible firms, it decreased borrowing for small firms that were already eligible for subsidized credit and larger firms that never qualified. Hence, the policy change resulted in a reallocation of credit from these firms to the newly eligible firms.

     


    [1] Paravisini, Daniel, Veronica Rappoport, Philipp Schnabl, and Daniel Wolfenzon.Dissecting the effect of credit supply on trade: Evidence from matched credit-export data. No. w16975. National Bureau of Economic Research, 2011.

    Bridges, Sarah, and Alessandra Guariglia. "Financial constraints, global engagement, and firm survival in the United Kingdom: evidence from micro data." Scottish Journal of Political Economy 55, no. 4 (2008): 444-464.

    [2] Banerjee, Abhijit V., Shawn Cole, and Esther Duflo. "Bank financing in India." (2003).

     

    Mudit Kapoor

    Backing out of Commitment Devices in Malawi

    Commitment savings products are a useful tool to help individuals with self control problems stick to their financial plans, but they are unnecessarily restrictive for individuals who want to back out of their commitments due to an unanticipated change in income or other household shock. To shed light on the mechanisms behind the failure to adhere to financial plans, researchers carried out a lab-like study in Malawi that mimicked real life choices. The study measured how often participants changed their financial plans, and what prompted those changes. When participants back out of financial commitments, is it due to self control problems or other factors such as spousal pressure, household shocks, or a lack of understanding about what the commitment entailed in the first place?

    Policy Issue:

    Commitment savings accounts have been used to increase savings and investment in economies as diverse as the United States, the Philippines, and Malawi.  These accounts are designed for customers who experience self-control problems and have trouble following through on their own plans to save money.  However, if people change their financial plans for other reasons, related to changes in income household needs, for example, then commitment savings accounts may actually make them worse off by reducing their flexibility to cope with shocks or correct mistakes. Therefore, to improve the design and targeting of these products, more evidence is needed on why some individuals do not follow through on their own financial plans.

    This evaluation studied the frequency with which individuals change financial plans made under commitment, and investigated whether revisions are correlated with time inconsistent preferences or other factors, including social or spousal preferences, unexpected changes in finances, or mistakes in planning for the future.  Such information can be used to improve the design and marketing of commitment savings devices as one of a portfolio of products to help people manage their income and consumption.

     
    Context of the Evaluation:

    Malawi’s economy is heavily dependent on agriculture. Most farmers have one harvest a year, and they need to save in order to smooth consumption over the year as well as invest in agricultural inputs for the next planting season. However, many farmers are unable to achieve their own savings goals and use less fertilizer than they planned.  Research suggests that commitment savings accounts may make it easier for farmers in Malawi to save for the next planting season, and that these accounts can have positive impacts on the amount of planting for the next season, sales from the next harvest, and consumption after harvest. However, more evidence is needed to understand why farmers have trouble following through on their plans, and whether commitment accounts are the most appropriate tool to help them.

    This project took place among Malawian tobacco farmers.  Tobacco is Malawi’s most important cash crop, and the return to investments in fertilizer is high for tobacco farmers.  The median participant was 46 years old, had four years of formal education, and lived in a village with 120 inhabitants. He had zero formal savings, and household assets worth approximately US$30.

     
    Details of the Intervention:

    Researchers carried out a two-stage field study that mimicked real life choices, using real stakes, to determine what motivates farmers to revise their prior choices and back out of commitments to save. The sample included husband-wife pairs in 1,071 households for a total of 2,142 respondents. Of those, 661 households were randomly selected to participate in stage two of the study.

    In the first stage of the experiment, all respondents made a series of 10 choices about how to allocate money between “sooner” and “later” time periods.  Money allocated to the “later” time period earned interest, which provided an incentive for patience.  Half of the choices pertained to a near-term time horizon:  receiving money one day or one month and one day after the interview.  The other half of the choices were in the “far” horizon and pushed the trade-off into the future:  either two or three months from the interview. 

    Decisions in this stage were used to measure respondents’ tendencies to be more patient about decisions in the future than the present, which is an indication of time-inconsistent preferences.  To give respondents the incentive to take the choices seriously and to set up the second stage of the study, households received vouchers redeemable for cash in accordance with one randomly-selected decision among 20 total (10 each for husband and wife) that the household made.  One voucher was issued for the amount of money that had been allocated to the “sooner” time period and a second voucher was issued for the money that had been reserved for “later.”  Each voucher could be redeemed for cash on or after its maturity date.  The amount of money was substantial, equivalent to about one months’ wages.

    For 661 households, the decision for which the two vouchers were issued was a far-horizon trade-off, with vouchers redeemable two and three months after the initial interview.  While the initial allocation had been made under commitment, households were unexpectedly revisited shortly before the first voucher could be redeemed and given the opportunity to reallocate the money between the two payment periods if they wished. The change between the initial and revised allocation thus measured the tendency to revise financial plans made under commitment.

    Surveys of all respondents at each stage measured household wealth and income.  During the initial survey, additional indicators of financial sophistication and expectations of future income were included.  In the second stage, respondents were asked about any changes in their expected income or unanticipated changes to their financial situations.

     
    Results and Policy Lessons:

    Eighty-one percent of the decisions made in the first stage were consistent with the law of demand. That is, individuals typically allocated more income to later periods when offered higher rates of return for waiting. This suggests that the majority of respondents understood the tradeoffs they faced.  While respondents were sensitive to interest rates, they also displayed considerable time-inconsistency, making different choices over the near than the far horizon.  While these static preference reversals were frequent, they were only slightly more likely to be present-biased as opposed to future-biased. 

    In the second stage, researchers found that revisions were common, often substantial in size, and that while some participants became more impatient and shifted money forward towards the “sooner” voucher, others became more patient and shifted money backwards towards the “later” period.  The first set of revisions, towards the sooner period, are the classic form of time inconsistent behavior that undermines savings and can be managed through products like commitment savings accounts.  Crucially, these revisions were predicted by present-biased preferences as measured in the first stage of the experiment, but not by other factors like changes in expected income, deaths in the household, financial sophistication (a proxy for mistakes), or pressure from one’s spouse.  People were also more likely to make present-biased revisions when they were revisited closer to the date on which the first voucher could be redeemed.

    Together, these findings are significant because they suggest that many instances of revising financial plans are due to time-inconsistent preferences rather than other factors.  Commitment savings accounts are useful tools for individuals who have present-biased preferences, but may be harmful for people who change plans for other reasons.  This study confirms an important role for commitment savings accounts as one way for people in developing countries to manage their consumption and savings. 

    However, present-bias is far from universal in this population, and policy design must take account of this heterogeneity. Efforts to help some combat temptation must avoid saddling others with commitments they do not need. 

    The Impact of Secured Transactions Reform on Access to Capital for Small and Medium Enterprises in Colombia

    Policy Issue: 
    Small and medium enterprises (SMEs) are thought to be an important source of innovation and employment in developing countries due to their flexibility in responding to new market opportunities and their potential for growth. However, entrepreneurs face a number of barriers to expanding their businesses and employing more workers, including limited access to credit and other financial services. For many firms, especially small and medium enterprises, collateral requirements are often an obstacle for getting access to finance. Banks usually require potential borrowers to provide collateral such as land or real estate, and will not accept collateral in the form of movable assets such as vehicles, machinery, or inventory, which SMEs are more likely to own. This mismatch prevents entrepreneurs from applying for and receiving formal loans. Banks may be unwilling to accept movable assets as collateral if there is no legal framework to govern and enforce this type of lending or if they lack knowledge on how to conduct movable asset-based lending. It is possible that regulatory reform providing such legal framework will encourage banks to adopt movable asset-based lending, helping SMEs access much-needed credit to expand and grow. Additional research is needed to understand how such programs should be designed and to what extent such regulatory reform actually expands access to credit for individual firms.
     
    Context of the Evaluation: 
    While Colombia has made a lot of progress in recent years in increasing access to finance for SMEs, entrepreneurs still report that access to finance is among the largest constraints to operating their businesses.1 According to the 2010 World Bank Enterprise Surveys, over 41 percent of firms in Colombia identified access to finance as a major constraint to operating their businesses, which is roughly ten percentage points higher than the average for the Latin America and Caribbean region. At the same time, prior to 2013, Colombia had no legal framework to govern the use of moveable assets as collateral, which restricted the ability of SMEs to take out loans secured with movable collateral. 
     
    The Colombian government, with support from the International Finance Corporation (IFC), an international development organization that focuses exclusively on the private sector, is introducing a new Secured Transactions Reform, which will provide a legal framework for the use and enforcement of movable collateral. The hope is that, by reducing the risk that banks face in accepting movable property as collateral, the reform will allow SMEs to use vehicles, industrial equipment, inventory, and other movable assets as collateral for their loans.
     
    Details of the Intervention: 
    In order to understand whether the Secured Transactions Reform has an impact on firm-level outcomes such as sales and employment, researchers will assign a randomly selected group of firms to receive extra encouragement to apply for loans under the new regulation. Out of a sample of 1000 SMEs across three Colombian metropolitan areas (Bogotá, Cali, and Medellín), 500 firms will be randomly selected to receive additional information and encouragement to apply for a loan secured with movable collateral. 
     
    The remaining 500 firms will serve as the comparison group. 
     
    Results and Policy Lessons: 
    Project ongoing. Results forthcoming. 
     

    1Enterprise Surveys, “Colombia (2010),” The World Bank. http://www.enterprisesurveys.org/Data/ExploreEconomies/2010/colombia

    Antoinette Schoar

    Evaluation of Female Supervisor Effectiveness in the Bangladesh Garments Sector

    In recent years, the ready-made garment sector has experienced rapid growth in Bangladesh. While overall, most of these new jobs have gone to women, few of them have been in management. At the same time, firms are under pressure to increase productivity. Researchers are exploring whether a vocational training program can successfully improve productivity and help women advance into management. 
     
    Note: This is not a fully randomized controlled trial.
     
    Policy Issue:
    Evidence suggests that the creation of secure, salaried jobs leads to a growing middle class and reduced poverty.[1] Increasing the productivity of medium and large-scale firms is thought to be one of the best ways to create these stable employment opportunities. As a result, policymakers and firms are both interested in programs that can improve productivity. A barrier to enhanced productivity is limited managerial expertise. Underperformance by management may arise from a lack of training or from failure to select the right managers. This study looks at the role of these two perceived constraints to productivity by evaluating the impact a vocational training program that prepares mostly female workers in the Bangladesh ready-made garment industry to become supervisors.
     
    Context of the Evaluation:
    The study examines the ready-made garment sector in Bangladesh, a sector that has historically played a crucial role in the early phases of the industrialization process. With labor costs rising in China, international buyers are increasingly sourcing from other countries. This has led to rapid growth of garment exports and employment in Bangladesh, with sector employment nearly doubling between 2002 and 2012.[2] However, pressure from foreign governments and multinational organizations to increase wages and improve working conditions could put the industry at risk if productivity levels do not also rise.
     
    Skilled management could play a key role in increasing productivity. But factories may be reluctant to pay for training out of fear that workers will leave to work for a competitor, while low-wage workers may not have the money to pay for formal training outside of work.
     
    Most of the recently created jobs have gone to women; about 80 percent of machine operators in the ready-made garment industry in Bangladesh are female. However, only about 5 -10 percent of supervisors are women.[3] It is possible that this limits communication and leads to quality defect and delays. Reducing this gender disparity could play an important role in increasing productivity.
     
    Description of Intervention:
    This project provided the GIZ Operator to Supervisor Training Program, which trains sewing machine operators to become line supervisors, to evaluate the impact of the training on female versus male participants and the effectiveness of female trainees who are promoted to supervisory roles. The program consists of 36 day-long training sessions held over a period of six weeks covering a variety of production, social, and leadership topics.
     
    Seventy-seven factories agreed to participate in the training. Each factory was offered a number of spaces in the training session reserved for female and male workers to allow for comparison of outcomes across genders. The trainings were highly subsidized to incentivize factories to participate.
     
    A baseline survey conducted with managers measured organizational and business practices. Additional surveys were conducted with training participants, workers nominated for but not (randomly) selected for training, and a sample of randomly-selected machine operators at three points in time: before the training, and four and ten months after training. Survey respondents also participated in a number of trust and communication exercises to measure effects of the program on collaboration between workers and supervisors. Detailed production level data was gathered in each factory throughout the study to measure the impact of the program on productivity, quality defects, working hours, and other productivity-related measures.
     
     
    Results and Policy Lessons
    Project ongoing. Results forthcoming. 
     

    [1] Banerjee, Abhijit V., and Esther Duflo. "What is middle class about the middle classes around the world?." The journal of economic perspectives: a journal of the American Economic Association 22, no. 2 (2008): 3.
    [2] Bangladesh Garment Manufacturers and Export Association (BGMEA), accessed September 24, 2014 http://www.bgmea.com.bd/chart/number_of_employment_in_garment#.U72ojfldX8o
    [3] Gender ratios are based on factories participating in the first phase of this project.

    Smoothing the Cost of Education: Primary School Saving in Uganda

    Even when there are no official school fees, the financial burden of purchasing uniforms, books, and other school supplies prevents low-income students from remaining in school. In Uganda, researchers tested whether a school-based savings program improved academic performance and reduced dropout rates by enabling students and their families to save for school-related expenses. A version of the program that labeled savings for educational purposes, rather than fully committing money to educational expenses, increased the amount students saved, expenditures on educational supplies, and test scores.
     
    Policy Issue:
    Although many countries in Sub-Saharan Africa have close to universal primary school enrollment, many students drop out before completing primary school or fail to continue to secondary school. While children drop out for a number of reasons, financial concerns are often an important factor. Even when governments eliminate school fees, there are still many costs associated with attending school. Providing basic school supplies such as uniforms, pens, pencils, and workbooks is often a significant challenge for low-income families. Furthermore, these families may lack access to formal savings services, making it difficult to set aside money for education. Even when families do have some savings, there is no guarantee they will use the money for educational expenditures. This evaluation assesses the impact of a school-based savings program that aims to encourage students and their parents to save for educational expenses.
     
    Context of the Evaluation:
    Uganda’s primary school enrollment rates have greatly increased since the government began providing free universal primary education. Retaining pupils, however, is more difficult and as few as 32 percent of children entering primary school complete all seven grades. While the government covers the cost of teachers and schools, many Ugandan primary schools require uniforms, and families are responsible for providing school supplies such as stationary and workbooks. The financial strain of buying these supplies is often too high for the family to sustain, and is cited as a major reason for children dropping out of school.
     
    Description of the Intervention:
    Researchers partnered with the Private Education Development Network (PEDN) and FINCA Uganda to implement and test the “Super Savers” program in public primary schools. Children in grades five through seven, the final three years of primary school, were given the opportunity to deposit money into lockboxes on a daily or weekly basis. The money was deposited into the school’s bank account at the end of each trimester. The bank accounts did not earn interest. At the beginning of the next trimester, bank representatives returned to the school to disburse the funds. On the day the funds were paid out, PEDN organized a small market at each school where students could purchase school supplies or school services such as practice exams or tutoring sessions.
     
    Schools were randomly assigned to have students’ savings returned in one of two ways:
    • Voucher payout: students received their savings in the form of a voucher that could only be used to buy supplies or school services at the market set up at the school. This created a binding commitment to spend savings on educational expenditures.
    • Cash payout: students received their savings in cash, which meant they could spend the funds either at the market set up at the school or however else they chose. 
    Students were notified of the kind of payout they would receive at the beginning of the program. There were 39 schools in each group, and an additional 58 schools served as a comparison group  received no savings account.
     
    Half of the schools in each payout group were also randomly assigned to receive parent outreach, in which workers from PEDN hosted a workshop for sixth- and seventh-grade parents to describe the various ways they could support their children’s education and to promote the savings program as a tool to help families finance school expenditures.
     
    Results and Policy Lessons:
    Researchers found that students deposited significantly more when their savings were returned in cash, rather than vouchers. On average, students in schools that received cash payouts deposited between 2,200 and 2,340 Ugandan shillings, while the average student who received voucher payouts deposited between 1,120 and 1,180 shillings.
     
    The purpose of the voucher payouts was to commit students to spend their savings on educational expenses. Cash payouts, on the other hand, imposed no restrictions on the use of savings, but did provide a weak commitment to spend savings on educational expenses by basing the savings program in schools and timing payouts to correspond with markets for school supplies. This weaker commitment may have appealed to students who value flexibility on how to spend their savings, while the voucher treatment’s stronger commitment may have discouraged them from saving.
     
    When combined with parent outreach, students who received cash payouts were significantly more likely to have a complete set of school supplies. They also had test scores that were 0.11 standard deviations higher than the comparison group. There were no significant positive effects on school supplies or test scores among students who received cash payouts without parent outreach or among students who received vouchers, with or without parent outreach. These results suggest that combining cash payouts from savings accounts with parental outreach can lead households to spend savings on education and improve student learning.
     

    Psychology of Savings: Commitment Savings Programs in the Philippines

    Researchers asked if sending regular text messages to clients reminding them to save encouraged Filipino account holders to increase their balances.

    Policy Issue

    With little money to spare, the poor are particularly vulnerable to the income shocks associated with unexpected events such as natural disasters or health emergencies. Many households facing these unexpected costs may be forced to take on debt or sell assets to remain afloat. Those with access to accumulated savings, however, may be better able to maintain constant consumption levels and avoid more drastic measures. Of course, savings is not only useful in times of emergency: many microfinance clients borrow repeatedly as a way of getting liquid cash, and some women always having loans outstanding. Savings may provide a cheaper (interest free) way for microentrepreneurs to finance business investments. Access to formal financial services is increasing, but many people in the developing world still do not have savings accounts, and many of those who have them do not use them. Though many people express a desire to save more, little is known about the best way to encourage people to follow through on the desire to save. 

    Context

    For a variety of reasons, the poor in the Philippines are underserved by traditional banks. Many live far from bank branches or are unable to meet minimum deposit requirements to open an account. But despite high levels of poverty, cellphones are extremely prevalent. Sixty percent of all Filipinos are estimated to be mobile phone subscribers and the total number of text messages sent everyday to phones in the Philippines averaged 1 billion in 2007. Even among poor households, cell phones can be an essential communications tool and many Filipinos send and receive text messages regularly. This unique situation, with a combination of a very high penetration of mobile phones and relatively low penetration of banking services, offers an opportunity to test whether text message reminders can influence savings behavior.

    Description of Intervention

    The First Valley Bank designed a savings product to allow clients to commit to savings and avoid spending saved funds. Clients who opened the “Dream” savings account were given a small box into which they could insert coins, but which only bank staff could open to take the coins out. The client could take the box to the bank, where the contents would then be deposited into the client’s account. Clients were restricted from withdrawing from their accounts until they had reached a certain “goal amount” and after a certain maturity date.

    The principle intervention consisted of sending periodic text messages to a subset of randomly chosen savings account clients. Half of the clients receiving reminders received positively framed messages, which emphasized that the client’s dreams would come true if she continued to save money, while the other half received negatively framed messages, which emphasized that those dreams would not come true if she failed to save. A third group, the comparison group, received no “reminder” text messages. 

    An independent randomization assigned some clients to receive “late” text message reminders, regardless of whether or not they had already been assigned to receive a regular reminder.  This late deposit reminder was only activated if the client failed to make their monthly deposit. These lateness reminders also varied between loss and gain wording, emphasizing either the gain of achieving one’s dreams or the loss of failing to achieve them.

    Results

    As a part of a cluster of savings experiments conducted in the Philippines, Bolivia, and Peru, results indicated that receiving a reminder increased the total amount saved in the bank by 6.3%. Clients randomly assigned to receive some form of reminder were also 3.1% more likely to reach their savings goal by the goal date.

    There was no evidence of a difference in the savings rates of clients receiving positively-framed versus negatively-framed reminders or late versus regular reminders.

    Empowerment and Livelihood for Adolescents in Sierra Leone

    Adolescent girls living in low-income settings may be trapped in a vicious cycle that prevents them from attaining employment and achieving better health outcomes and reproductive autonomy. Researchers will evaluate the impact of a program in Sierra Leone that aims to address this problem by bundling health education, vocational skills training, and micro-credit. They will evaluate the impact of these programs components, together and individually, on girls’ economic activity, engagement in sexual and risky behaviors, and future goals.

    Policy Issue:

    Adolescent girls in low income countries appear to be trapped in a vicious circle where low skills and poor labor market opportunities make girls turn to (often older) men for financial support; this increases the chances of childbearing that, in turn, further reduces the chances of acquiring useful skills and future labor force participation. In previous research in Uganda, researchers found that a combination of health education and vocational skills training can break the vicious circle. This study aims to assess where the causal chain starts, namely, whether it is the lack of health education, skills, or credit that keeps adolescent girls trapped in the vicious cycle of high fertility and low labor force participation.

     
    Context of the Evaluation:

    In Sierra Leone, teenage pregnancy and early childbearing are pervasive: of all pregnancies, 34 percent occur amongst teenage girls (SLDHS 2008) and 40 percent of maternal deaths occur as a result of teenage pregnancy (MICS 2010). In 2013, the Government of Sierra Leone launched a Strategy for the Reduction of Teenage Pregnancy, which aims to reduce the adolescent fertility rate by 4 percentage points by 2015. As part of this strategy, the government has partnered with UNICEF and BRAC to implement the Empowerment and Livelihood for Adolescents (ELA) program. BRAC is implementing the ELA program in six countries globally. In Africa, the program has already been implemented and evaluated in South Sudan, Tanzania, and Uganda.

     
    Details of the Intervention:

    Researchers designed a randomized evaluation, which is being implemented by IPA, to evaluate the impact of the ELA program and its various components on girls’ economic activity, engagement in sexual and risky behaviors, and aspirations. In addition, they will assess if the program affected girls who did not participate in the program but have social ties with those who had. 

    The program operates from adolescent development centers, or “clubs,” staffed by BRAC trained mentors, who are older adolescent girls from the same communities. Researchers will evaluate the following three program components, together and individually:

    • Health education ("life skills training") which is mostly delivered by trained mentors, covers the following topics: sexual and reproductive health, early pregnancy, menstruation and menstrual disorders, leadership among adolescents, gender, sexually transmitted infections, HIV/AIDS, family planning, gender-based violence, and adolescent responsibility within the family and community. Group learning is encouraged through participatory classroom trainings. In addition, the girls receive issue-based sexual and reproductive health training from the BRAC Health Program. Girls aged 13-24 can participate in the health education training.
    • Vocational (“livelihood”) training covers the skills required to engage in different income generating activities and financial literacy. Girls can choose to receive training in hairdressing, tailoring, animal husbandry, or agriculture. The training lasts about a month and is delivered by local service providers in Sierra Leone. The financial literacy module covers topics such as budgeting, financial services, financial negotiations, and accounting. Following successful completion of training, trainees receive input supplies to start their chosen business activity. To prevent school dropout, only girls aged 17-24 are eligible for training.
    •  Microcredit  Eligible girls who are engaged in a self-employment activity will be offered credit of up to US$100 to finance their business. The loan duration will be one year with an annual interest rate of 25 percent and weekly repayments. Girls aged 17-24 are eligible for credit.

    Participants will be randomly assigned to one of the following four groups, each consisting of 50 villages and 1,400 adolescent girls:

    (1)  Health education

    (2)  Health education, vocational training

    (3)  Health education, vocational training, microcredit

    (4)  Comparison group: No program

    Results from this replication study will allow for a cross-country comparison of the program’s effects and help to build the evidence on the program’s impact. In addition, by introducing different treatment groups this evaluation aims to separate the effects of the programs different components, which will provide important information to partners on how the program should be expanded. Moreover, information drawn from individuals about the relationships they have with others in their village, known as social networks data, will reveal how information and skills acquired by program participants spreads to non-participants.

    Results and Policy Lessons:

    Results forthcoming.  

    Read more about the ELA Sierra Leone program here

    Read about previous research on the program in Uganda here.

    The Impact of Computer-generated Credit Scores on Lending in Colombia

    Small and medium enterprises are seen as promising engines of growth in developing countries but often fail to live up to their potential because of barriers to growth such as limited access to credit. Researchers used a randomized evaluation to measure the impact of introducing computer-generated credit scores on lending to micro and small enterprises in Colombia. The program significantly increased productivity in the loan approval process and improved allocation of credit without affecting average loan amounts and default rates.    

    For additional information on current SME Initiative projects, click here.

    Policy Issues:

    Small and medium enterprises (SMEs) are thought to be an important source of innovation and employment in developing countries due to their flexibility in responding to new market opportunities and their potential for growth. However, entrepreneurs face a number of barriers to expanding their businesses and employing more workers, including constrained access to credit.

    Whereas assessing the credit-worthiness of prospective borrowers has become relatively cheap and easy in developed countries through the use of credit scoring, in developing countries this process can be cumbersome in the absence of reliable information about the  credit or financial history of potential bank clients. The high costs associated with assessing the riskiness of loan applicants can outweigh the financial returns of lending, making banks reluctant or unable to make loans to SMEs. Credit scoring has been used successfully in the United States and other developed countries to reduce the cost of identifying creditworthy applicants, but there is little evidence on whether computer-based credit scoring might work in developing country contexts.

     
    Context:

    Researchers partnered with BancaMia, a for-profit bank that lends to small and medium businesses in Colombia. Prior to this study, BancaMia made all of its lending decisions based on information collected by loan officers. Applications incorporating the collected information were reviewed by a credit committee, who could approve or reject them. In difficult cases, the committee could also refer the application to upper-level managers or postpone their decision until more information was collected. The loan approval process under this system was under the discretion of the committee and was very expensive due to the high number of referrals and rounds of information collection. In an effort to improve its loan approval process, BancaMia developed its own credit scoring software, which produces a credit score based on verifiable client information.

    Details of the Intervention:

    Researchers, in collaboration with BancaMia, used a randomized evaluation to measure the impact of the credit scoring software on the loan approval process and loan outcomes.  

    Out of  1421 loan applications that were scored through the new software, 1086 scores were randomly chosen to be revealed to the committee.  Scores were revealed either at the beginning of the application review process or after the committee had finished an initial review and made an interim decision about whether or not to offer a loan. Although the committee in the latter case did not know the applicant’s exact score, they did know that a score could become available once they reached a decision.

    Researchers collected information about various aspects of the loan approval process (e.g., the average time spent evaluating an application, the number of approvals and rejections issued etc.) as well as loan performance and default rates.

    Results:

    Impact on Credit Committee Effort and Output:

    Revealing the computer-generated credit scores at the beginning of the application review process  increased both the probability of the committee making a decision and the amount of effort put into the review. Seeing the score in advance raised the probability of the committee reaching a decision by 4.6 percentage points from a base of 89 percent. This change was driven by the reduction in the number of applications referred to bank managers and  the number of cases for which the commitee requested more information to be collected for a second round evaluation. In addition, the committee spent more time evaluating loan applications, especially the difficult cases (e.g., applicants that requested larger loans).

    The committee also became more productive when it knew that a score would become available after the initial evaluation. The anticipation of seeing a score increased the probability of the committee making a decision to approve or reject an application by 3.9 percentage points. This improvement in committee productivity even in the absence of a credit score suggests that the committee might already have had the necessary information to make decisions on difficult applications, but lacked the incentives to use this information efficiently.

    Impact on Loan Allocation and Outcomes:

    Although providing computer-generated scores to the committee did not affect loan outcomes such as the average size of loans issued or default rates among borrowers, it did improve credit allocation. Computer-generated credit scores reduced uncertainty about borrowers’ creditworthiness, allowing banks to extend larger loans to less risky borrowers and smaller loans to riskier borrowers. As a result, there was no change in average loan size issued, but the bank was better able to match its lending to borrower characteristics.

    Considered together, these results show that the credit scoring program had significant impact on the bank’s productivity. Specifically, summarizing the credit worthiness of prospective borrowers into a single, easy to understand number increased the quantity of difficult cases that the credit committee resolved. The score also nudged committee members to put in more effort on difficult applications. This could potentially reduce the workload of bank managers and reduce the cost of administering loans for the bank. The increase in productivity without providing new information to the credit committee also implies that banks may need to better incentivize their employees who hold useful information.

    Related Paper Citations:

    Paravisini, Daniel, and Antoinette Schoar. "The Incentive Effect of IT: Randomized Evidence from Credit Committees." NBER Working Paper No. 19303, August 2013.

    The Impact of Smartcard Electronic Transfers on Public Distribution

    Advances in payments technology have the potential to improve the efficiency of slow and corrupt public welfare programs. Researchers tested how Smartcards, which coupled electronic transfers with biometric authentication, affected the functioning of two government welfare schemes in India. They found that even though the new Smartcard system was not fully implemented, it resulted in a faster and less corrupt payments process without adversely affecting program access. Investing in Smartcards was cost-effective, and beneficiaries overwhelmingly approved the new payment system.
     
    Policy Issue 
     
    State-sponsored welfare programs are often constrained by corruption and inefficiency. The problem is of particular concern in India, where by some measures, only 15 percent of spending on social programs actually reaches the intended beneficiaries. Such corruption strains state finances and reduces the potential impact of government programs. Transferring benefits through payment systems that use biometric authentication to verify recipients’ identities may help address these challenges. Secure electronic transfers may reduce financial leakages, transaction costs, and time spent accessing payments. However, reducing one form of corruption may simply displace it into other areas, and switching to electronic payments may also limit participation if beneficiaries do not register for biometric cards, if they lose their cards, or if technical challenges prevent them from receiving payments.  
     
    Evaluation Context
     
    In India, there is widespread interest in using new payments technologies to improve the performance of public welfare programs and increase financial inclusion. In 2009, the national government launched an ambitious initiative, called Aadhaar, to give all 1.2 billion residents unique, biometric IDs, and then make payments to beneficiaries of social programs via bank accounts linked to these IDs.
     
    Some state governments have developed their own electronic transfer systems alongside the national identification project. In 2006 , the Government of Andhra Pradesh, in southeast India, started an initiative to shift towards using "Smartcards" to transfer government benefits to the poor. While the government intends to eventually use Smartcards for a wide range of programs, it piloted their use with two large social welfare schemes: the Mahatma Gandhi National Rural Employment Scheme (NREGS)—which guarantees rural households 100 days of paid employment per year—and Social Security Pensions (SSP)—which makes monthly payments to elderly, widowed, and disabled individuals. In 2010, facing several logistical challenges, the government decided to restart the program in eight districts where the Smartcards had yet to be rolled out. These eight districts, which are spread throughout the state, have a combined rural population of about 19 million people. 
     
    Description of the Intervention 
     
    Researchers used a randomized evaluation to assess the impact of Smartcards on leakages in NREGS and SSP, and the welfare of program beneficiaries. Researchers partnered with the Government of Andhra Pradesh to randomize the roll out of the program in the eight districts that had not yet received Smartcards in three waves over two years. The Smartcard program was introduced in 113 mandals (sub-districts) in the first wave, 195 mandals in the second wave, and the remaining 45 mandals in the third wave. The analysis compared the first wave to receive the program with the third wave of mandals, where Smartcards were not introduced until after the final survey.
     
    The program introduced two major changes to the existing payment system: it required beneficiaries to biometrically authenticate their identity before collecting payments, and it delivered payments through a Customer Service Provider (CSP) in each village, rather than at a more distant post office. When beneficiaries enrolled in the Smartcard program, their fingerprints and a photograph were taken, and they were issued a bank account and a Smartcard, which contained a chip storing the biometric and bank account information.
     
    In order to collect a payment, beneficiaries visited the local CSP, who was usually a secondary school-educated woman from a traditionally disadvantaged caste who resided in the village. The CSP kept a small device which could read the beneficiary’s fingerprint and match it with the details stored in the Smartcard. If the match was successful, the CSP disbursed cash and the authentication device printed a receipt.
     
    Results
     
    Researchers found that the Smartcard program reduced the time it took beneficiaries to receive payments, reduced leakages, and increased beneficiary satisfaction, even though it was not fully implemented. 
     
    Take-up: After two years, about 81 percent of villages in the first wave of the program rollout had installed the Smartcard-based payment system for NREGS and 86 percent had adopted it for SSP. In villages where the new payments system was available, about 65 percent of payments were made to beneficiaries with Smartcards, meaning that just over 50 percent of all payments in treatment areas were made using the new system.
     
    Payment time: In areas assigned to adopt the Smartcard payment system, the amount of time NREGS beneficiaries spent collecting payment fell by 21 minutes (a 19 percent reduction from 112 minutes). The system also reduced the lag between working on an NREGS project and collecting payment by about seven days (a 21 percent reduction from 34 days). There was no significant effect on the amount of time SSP beneficiaries waited to collect their payments, but unlike NREGS payments, these payments were delivered at the village-level prior to the adoption of Smartcards. 
     
    Leakages: NREGS recipients in areas assigned to receive the Smartcard system reported weekly earnings that were Rs. 35 higher (a 24 percent increase from Rs. 146). However, there were no major impacts on the amount the government spent on the NREGS program, suggesting a reduction in leakages. There was no significant impact on earnings for SSP beneficiaries, as these benefits were fixed, but there was a 1.8 percentage point reduction in the incidence of bribes demanded for disbursing payment (a 47 percent reduction from 3.8 percent). 
     
    Beneficiary satisfaction: In surveys, 84 percent of NREGS beneficiaries and 91 percent of SSP beneficiaries preferred Smartcards to the status quo. However, many recipients feared losing their Smartcards (53 percent of NREGS beneficiaries and 62 percent of SSP beneficiaries) or reported having problems with the authentication device (49 percent of NREGS beneficiaries and 59 percent of SSP beneficiaries).
     
    Cost effectiveness: Researchers estimated the value of the time beneficiaries spent collecting payments and found that the value of time savings to beneficiaries (US$4.44 million) was approximately the same as the cost of the new system (US$4.25 million) for NREGS. Although the cost savings were less substantial for SSP (US$320,000, with system costs of US$1.85 million), these calculations suggest that the times savings to beneficiaries alone can sometimes justify the costs of implementing improved payments technologies. On top of these pure efficiency gains, there was an estimated $38.7 million reduction in annual leakage.
     

    The Impact of Formal Savings on Salaried Workers’ Spending and Borrowing in Eastern Ghana

    Commitment savings products are designed to help people overcome social and behavioral barriers to saving money, but many questions remain about how, and in which cases, these products work. We are using a randomized evaluation to test the impacts of a commitment savings product, which pulls savings directly from electronically deposited salary payments, on various financial and behavioral outcomes in Ghana. To the knowledge of the research team, this is the first study on salary withdrawal savings plans in a developing country context.

    Policy Issue:

    A growing body of literature suggests that commitment savings products—voluntary arrangements designed to help individuals overcome social and behavioral barriers to savings—are very effective in increasing savings. However, there are several open questions regarding how these commitment devices work. For example, where does the savings come from? Do people reduce savings elsewhere, reduce their loans and transfers to others, or reduce spending on luxuries or basic necessities? Once the lump sum within the commitment savings device is released, how is it used? Are there any long-term impacts of having participated in the commitment savings program on economic activities, income, savings, debt, or spending behavior? Is the answer different for men and women? This study aims to address these issues.

    Additionally, this research will provide much-needed evidence on commitment savings devices from the deposit side, as compared to the withdrawal side, and it will provide evidence from a developing country context on salary withdrawal savings plans. This research is also unique in that it focuses on relatively better-off, higher status individuals.

     
    Context of the Evaluation:

    The Government of Ghana has begun paying its employees electronically, with individuals’ salaries paid directly into their bank accounts. These salaried workers tend to be more educated and have higher and more stable incomes than the average Ghanaian, and are often seen as providers within their households and communities.

    North Volta Rural Bank (NVRB) is a rural bank located in the North Volta Region in Eastern Ghana. The bank offers customers whose salaries are electronically deposited by their employer the opportunity to take out high interest payday loans (temporary overdrafts) against their incoming salary. The majority of the bank’s salaried customers have taken these payday loans at least once, and many customers have taken out these loans repeatedly.

    In an effort to keep customers from falling into a situation in which they are unable to meet their financial commitments, North Volta Rural Bank created a product, called “Salary Susu Plus,” in which customers commit to having a fixed amount taken directly from their salary and put in a commitment savings account for an 18-month period.

     
    Details of the Intervention:

    We are testing the impact of the Salary Susu Plus (SSP) product on study participants’ economic activities, spending and savings behavior, and amount of debt during, immediately after, and six months after the commitment period, and whether the impact differs across gender.

    All North Volta Rural Bank customers with salaried accounts are being invited to participate in this study. For the 320 individuals (245 men and 75 women) who agreed, the bank randomly assigned half to a treatment group. Clients in the treatment group are being offered an opportunity to sign up for the SSP program, and of these, 71 percent joined the program. Those not offered the product served as the comparison group.

    Participation in SSP involves committing to automatically transfer a fixed amount of one’s directly deposited monthly salary into an SSP account every month for a period of 18 months. The automatic transfer has to be at least 30 Ghana cedis (approximately US$10) per month. In practice, the mean monthly contribution amount is 43 Ghanaian cedis, which is equivalent to 9 percent of the average study participants’ monthly salary. At the end of the 18 months commitment period, the customer is able to withdraw all savings in the SSP account, along with a bonus equal to one month’s contribution. While clients can withdraw funds from their SSP accounts before the commitment period ends, they can only do so by leaving the SSP program, which means they forfeit the bonus payment and must also pay a penalty equal to one month’s contribution.

    The bonus amount is designed to give customers a return on their investment that is more than double the return they would receive on a normal savings account. The minimum monthly contribution amount is set to be one-eighteenth of the average payday loan size so that the accumulated lump sum would be equivalent to the average size of a payday loan.

    Study participants are being be surveyed before, during, and after the 18-month commitment period.

     
    Results and Policy Lessons:

    Results forthcoming.

    Motivating Take Up of Formal Savings

    Policy Issue:

    Savings are crucial for managing irregular and unpredictable cash flows in order to meet daily needs, finance lumpy expenditures, and deal with emergencies. For poor households, informal tools like credit from moneylenders are often less efficient than savings mechanisms as they require high interest rates to finance predictable and recurring expenses.  Evidence suggests that these households often have excess financial capital after covering subsistence expenses that could be used for savings. Access to and utilization of financial products that help the poor save funds for the future may have substantial welfare consequences.

    The recognition of this need has led to the creation of greater financial access throughout the developing world. Banks, for instance, have increased their reach over the past decade in Sub-Saharan Africa, offering savings accounts with minimal fees and opening requirements. Take-up of formal savings accounts among the poor, however, remains low. Why do poor individuals fail to take advantage of the lower-risk, lower-cost vehicle for saving that bank accounts offer? This study evaluates the relative importance of individual beliefs, psychological factors, and transactional barriers to opening accounts. 

    Context of the Evaluation:

    Tamale, located in the Northern Region of Ghana, is the third largest city in the country. It has a quickly growing economy and has recently experienced a financial services boom: approximately three banks had opened new branches within the three-year period preceding this study. These banks have also made efforts to design accounts with minimal requirements and fees to be accessible to the poor.  The take-up of these products among poorer demographics, however, has been low. During the study, Zenith Bank, which opened its branch in Tamale in 2009, offered savings accounts with no requirement for an opening balance and no fees. Innovations for Poverty Action conducted this study in collaboration with Zenith Bank to provide access to formal saving accounts to individuals who face specific expenditure opportunities that might otherwise be financed with credit. This study aims to determine which of several treatments is most effective in encouraging individuals to open a formal savings account.

    Details of the Intervention:

    The sample in this study includes 1,831 market vendors who had businesses in the central market of Tamale. These vendors were mostly female and illiterate and owned businesses that sold a wide variety of products including rice, tailored clothing, household items, and produce. This demographic was ideal for the study because: (1) Market vendors earned a steady source of revenue from their businesses and thus had funds they could potentially save; (2) These vendors often relied on informal credit to finance major expenditures, such as school fees, business inventory, and rent; and (3) The market was close to several local banks, including Zenith Bank, the partner for this study. 

    A baseline survey was administered to the market vendors to collect data on businesses, common expenditures, savings and loan behavior, and financial attitudes. Afterward, representatives of Zenith Bank came to the market to offer savings accounts to those who had received the baseline survey.  All savings accounts included weekly reminders to save via text message.  Participants received three types of treatments randomly assigned before the account-offering:

    • Framing Condition: Individuals were randomly assigned into one of three groups. Those in the Comparison Group received no treatment.  Those in the Information Group were provided with specific information from previous studies about how much more individuals save when they receive reminders to save.  Those in the Emotion Group were asked to tell a story that generates positive and hopeful emotional feelings.
    • Cost Condition:Individuals were randomly assigned to one of two groups. Those in the Zero Cost Group were encouraged to open an account and could do so without ever visiting the bank.  Those in the Transaction Costs Group were encouraged to open an account but had to visit the bank to do so.
    • Savings Tools:Individuals were randomly assigned to one of three groups. Those in the Comparison Group received no tools with their account. Those in the Financial Plan Group received a customized simple savings plan to finance a specific expenditure.

    The primary study outcomes were a) willingness to open a formal bank account with Zenith band and b) savings deposit behavior after opening accounts.

    Results:

    The strongest treatment effect came from removing all transaction costs for opening a bank account.  Individuals were more than ten times more likely to open an account when they could open accounts directly at their place of business.  Convenience seems to be a primary motivating factor in decision-making about interacting with formal banking.

    Specific information did not increase the likelihood of opening an account or making savings deposits.  If anything, specific information about the benefits of saving with regular reminders decreased the willingness to open an account unless that information was highly positive.  Emotional framing also had no statistically significant effect on account opening. 

    While many individuals opened accounts, relatively few individuals continued making deposits over a long-run horizon.  Six months after the study the majority of account holders were not making regular deposits (no individuals in the high transaction cost group continued to make deposits while 2.5% of individuals who could open accounts in the field continued to make deposits).  For this reason, we see no impact of specific savings tools on the level of savings.

    Reminder Messaging and Peer Support for Debt Reduction in the United States

    There are growing concerns that American households tend to borrow too much and save too little, making it hard to meet basic needs, build assets, prepare for retirement, and pay for emergency expenses. Large debt burdens may compromise individuals and families’ ability to create a safety net or make investments for the future. In an ongoing study, researchers are evaluating the effect of peer support and text message reminders on financial outcomes of individuals enrolled in a debt management program in the United States.
     
    Policy Issue: 
    There are growing concerns that American households tend to borrow too much and save too little. This imbalance can have strong implications for households’ ability to meet basic needs, build assets, prepare for retirement, and weather negative shocks such as emergency expenses or unexpected unemployment. Families with large debt burdens may continue to borrow and thus compromise their ability to create a safety net or make investments in the future. Many see Debt Management Plans (DMPs) as a promising tool for debt reduction, yet creating a DMP and sticking to the program requires ongoing work and effort. Descriptive evidence suggests that limited attention, apprehension about giving up credit cards, a perceived lack of support, and the five-year time period of plans may hinder clients from completing them. To promote DMP use and completion, text message reminders and peer support programs may help individuals follow through on DMP commitments. However, little evidence exists on the effectiveness of such programs and whether they help people reduce their debt.
     
    Context of the Evaluation: 
    Low-income individuals in the United States often rely heavily on expensive financial services such as payday loans, auto title loans, pawn shop loans, and bank overdrafts. Individuals frequently turn to expensive debt obligations because their riskiness disqualifies them from traditional, lower-priced alternatives.
     
    Clarifi is a non-profit organization that provides low-cost access to various financial products, services, and resources. Debt Management Plans (DMPs) are one of Clarifi’s financial planning tools that aim to help clients manage and repay their debt with the help of experienced credit counselors. The retention rate of clients who join Clarifi’s DMP programs is 80 percent, meaning that 20 percent of DMP enrollees leave the program within the first year.
     
    Details of the Intervention: 
    Working with Clarifi and its Debt Management Plan clients, researchers are evaluating the effect of various messaging and peer support programs on the financial outcomes of participants. The evaluation involves 1,000 of Clarifi’s clients in southeastern Pennsylvania, southern New Jersey, New York state.
     
    As part of Clarifi’s general program, all clients in the study participated in educational workshops and outreach, as well as debt repayment counseling prior to enrollment in a DMP. At the time of enrollment into DMPs, researchers randomly selected individuals to receive peer support, reminder messages, or both. Those in the peer support group were able to select up to five peer supporters (friends of family) to monitor their progress on a DMP. Peer supporters received information on the client’s progress, including notification when the client missed a scheduled debt payment. 
     
    To test the impact of regular text message reminders, individuals from each group (peer support or no peer support) were then randomly divided into a comparison group (no messaging) or one of three message reminder types: tasks, plans, or goals. These messages are designed to counter specific types of limited attention.
     
    Results and Policy Lessons: 
    Project ongoing, results forthcoming.

    Redesigning Microsavings – Evidence from a Regular Saver Product in the Philippines

    Microloans are often taken out to pay for everyday expenses or as recurring business capital, when the same goal could be accomplished through regular savings, without interest fees. This study tested whether the commitment features of a loan, specifically the regular payment schedule and penalties for default associated with a loan could also be applied to a savings account. In the Philippines’ Gingoog City and Camiguin Island, households were offered a new savings account which required committing to a regular deposit schedule with a financial penalty for missing payments. Savings rates and other outcomes were compared to those with a traditional commitment savings account and a comparison group.
     
    Policy Issue:
    Evidence suggests that microloans and informal loans are often taken out for consumption (such as school fees or wedding expenses) or for recurring business expenditures, rather than as a one-off investment (for example, to finance a land purchase or to start a business).1,2 If these loans are not being used to generate new income, it is unclear why individuals are willing to pay substantial loan interest charges rather than choosing to save in advance for these foreseeable expenses. 
     
    Traditional commitment savings accounts3,4 allow users to restrict withdrawals until a pre-set savings goal is reached. Restricting withdrawals of past savings without requirement or incentives for the user to make future deposits may pose a challenge for savers who have trouble sticking to a regular deposit schedule. A natural extension of traditional commitment products to savings accounts would mimic the terms of a loan - such as frequency of payments and penalties for noncompliance - and provide people with a way to self-enforce their savings plan without incurring the cost of interest. 
     
    Context of the Evaluation:
    IPA partner 1st Valley Bank is a rural bank that offers microcredit, agricultural insurance, salary loans and other financial services. The study takes place in 22 low- to middle-income barangays (small administrative units) of Gingoog City, as well as in 9 barangays on Camiguin Island. The target population is low- to middle-income households between one and two jeepney (local public transportation) rides from the bank branch, who report having an upcoming expenditure (school fees, house repairs, appliance purchase, business expense, wedding, etc.).
     
    Description of the Intervention:
    This study is designed to ascertain whether a commitment savings product with fixed installments – a product which looks like a loan except for the timing of the lump sum disbursement and the interest charges – has any effect on individuals’ savings levels, loan take-up and welfare, and compare this to the effect of a commitment savings product. 
     
    The product studied, called a Regular Saver Account, lets clients commit to make a fixed savings deposit every week, until they have reached their specified goal date and amount. This is presented to habitual borrowers as an alternative way to reach the lump sum needed for an expenditure they have specified. The commitment takes the form of an “early termination fee”: If clients fall more than two deposits behind their specified deposit schedule, their contract is considered “in default”, and the account is closed. They receive back their savings, minus the “early termination fee.” The amount of this fee is chosen by the client himself upon signing the contract, and framed as a charity donation.
     
    Households that passed the screening criteria (having an upcoming lump-sum expenditure, willingness to see a financial advisor) were visited by a financial advisor and received a personal savings plan (limited to 3-6 months), and a free standard savings account. In addition, they were randomly assigned to one of three groups: a first group that was offered the Regular Saver (RS) product, a second group that was offered a traditional commitment savings product with withdrawal restrictions (WR), and a third group that served as a control and was not offered any additional products. 
     
    A comprehensive baseline survey was conducted before the financial advisor visit. The survey identified individuals’ time preferences and financial networks, and measured risk aversion, self-control, and financial literacy. A similar endline survey was conducted six months later which included questions regarding outstanding loans, total savings, total expenditures, and satisfaction with the savings product for those who were offered any of the two commitment accounts. Additional administrative data on savings was obtained from the bank.
     
    Results:
    The study finds that demand for commitment is high, even in a low-income population with little previous bank exposure: Take-up rates were 27 percent for the Regular Saver (RS) product and 42 percent for the Withdrawal-restriction (WR) product, in spite of the fact that all individuals were given a free standard savings account immediately before they were offered the commitment products. Offering the RS product was highly effective at increasing savings: On average, those offered the RS product increased their bank savings by 585 pesos (U.S. $14 or 27 percent of median weekly household income) relative to the control group. The group offered the WR account saved on average 148 pesos (U.S. $3.50 or 7 percent) more than the control group. Among those who actually adopted the products; the RS clients saved 1,928 pesos and the WR clients saved 324 pesos more than the control group. In addition, those who were offered the RS product were more likely to buy the expenditure specified in their savings plan without borrowing for it.
     
    This average effect obscures significant heterogeneity: 55 percent of RS clients defaulted on their savings contract, incurring their self-chosen penalty (between $3.50 and $7). Among WR clients, 79 percent made no further deposits after their opening balance, losing access to the money for those who had chosen an amount-based withdrawal restriction (45 percent). 
     
    In summary, despite large positive average treatment effects, many savers appear to overestimate their ability to stick to their commitments, even with self-imposed penalty features. The study thus highlights a possible risk of interventions which involve commitment.
     
     
     
    [1] Mullainathan S, Ananth B, Karlan D. (2007). Microentrepreneurs and Their Money: Three Anomalies. Financial Access Initiative.
    [2] Karlan, D., and Zinman, J. (2012). List Randomization for Sensitive Behavior: An Application for Measuring Use of Loan Proceeds, Journal of Development Economics , 98, 1 (Symposium on Measurement and Survey Design), 71-75
    [3] Brune, Lasse, Xavier Giné, Jessica Goldberg, and Dean Yang. (2011). "Commitments to save: a field experiment in rural Malawi." World Bank Policy Research Working Paper Series.
    [4] Ashraf, N., Karlan, D., and Yin, W. (2006). "Tying Odysseus to the mast: Evidence from a commitment savings product in the Philippines." The Quarterly Journal of Economics 121:2, 635-672.

    Financial Literacy, Access to Finance and the Effect of Being Banked in Indonesia

    Poor people in low-income countries often exhibit a low demand for formal financial services. Is that due to limited financial literacy, or to the high cost of accessing such services? In this study in Indonesia, researchers measured household financial literacy and its impact on demand for financial services. Participants who had received a standard financial literacy training program were no more likely to open a bank account than those who were not offered the program. In contrast, small financial subsidies worked: an offer of a $14 reward (relative to a $3 reward) significantly increased the share of households opening a formal savings account.

    Policy Issue: 
    Savings and investment are widely thought to be important factors in a country’s economic growth. However, the determinants of demand for financial services are not well understood, particularly in low-income countries where a large proportion of the population still uses informal financial services such as moneylenders or savings groups. There are two plausible theories that may explain this limited demand for formal financial services in low-income countries. First, because these services involve high fixed costs and are therefore expensive to provide, low-income individuals may not be find the services provide sufficient value compared to the user cost. Alternatively, limited financial literacy – knowledge or understanding of financial services and products – may serve as a barrier to demand for financial services: if individuals are not familiar or comfortable with financial products, they are unlikely to try to use them. While these two ideas are not mutually exclusive, they have significantly different implications for the development of financial markets around the world, and suggest very different actions for those wishing to expand financial services use.
     
    Context of the Evaluation: 
    In Indonesia, financial literacy is believed to be one of the most important barriers to accessing credit. This may in part be explained by low levels of education: measured as a share of GDP, education expenditures in Indonesia are the lowest in the world. However, and in contrast to many developing countries where access to credit is sparse, the Indonesian banking system has a wide geographical reach. Moreover, Indonesian banks have traditionally offered savings accounts with low minimum deposits designed to serve the needs of low-income customers. The minimum deposit to open a savings account is the nation’s largest bank, Bank Rakyat Indonesia (BRI), is only US$0.53, and interest is paid on balances greater than US$1.06. This is significant, considering that the per-capita income in Indonesia is approximately US$1,918. Yet only 41 percent of the total population and 32 percent of rural Indonesia households have a formal savings account.
     
    Details of the Intervention: 
    In order to measure household financial literacy and its impact on demand for financial services, researchers conducted a household survey in Indonesia between July and December 2007. Around 3,300 households across 112 villages in Indonesia were randomly selected to participate in the survey, which covered financial literacy as well as other household characteristics that might be important determinants of financial behavior, including cognitive ability, educational status, risk aversion, asset ownership, and demographics. The survey results were supplemented by data from a comparable 2006 survey of 1,500 households in India.
     
    After completing the financial literacy survey, each of the unbanked households in Indonesia was invited to participate in a follow-up field experiment, designed to directly test the relative importance of financial literacy and prices in determining demand for banking services. If a respondent agreed to participate, he or she was subsequently randomly assigned a financial incentive level, ranging from US$3-$14, to open a savings account with Bank Rakyat Indonesia. Half of the respondents were then randomly chosen to attend a two-hour financial training session to be held in the village on a weekend within the month. Researchers worked with Microfinance Innovation Center for Resources and Alternatives (MICRA), an organization that provides consulting and training programs to banks and microfinance organizations in Indonesia, to develop a targeted training curriculum and a two-day training program for all trainers.
    Household surveys were complemented by administrative data from Bank Rakyat Indonesia to measure the impact of incentives and the financial education program on savings account take-up.
     
    Results and Policy Lessons: 
    The survey results from both India and Indonesia suggest that, while financial literacy is low, especially in India, it is an important predictor of household financial behavior and well-being. Moreover, the demand for financial education seems to be quite high: 69 percent of those invited to participate in the financial education program choose to attend the course.
     
    However, the experimental results indicate that the financial education program was not an effective tool for promoting the use of bank accounts. The program had no effect on the probability of opening a formal savings account, except for households with no schooling, for whom training increased the probability of opening an account by 12.3 percentage points.
     
    Modest financial subsidies, in contrast, had large effects, significantly increasing the share of households that opened a formal savings account within the subsequent two months. An increase in the incentive from US$3 to US$14 increased the share of households that open a formal savings account from 3.5 percent to 12.7 percent, an almost three-fold increase. Follow-up analysis conducted two years after the intervention also showed that households that received the highest incentive were significantly more likely to still have used their bank accounts in the past year compared to those who received the lowest incentive.
     
    Overall, the results suggest that take-up of formal financial services may be more easily achieved through measures designed to reduce the price of financial services, rather than through large-scale financial literacy education. 
     
    Related Papers Citations: 
    Cole, Shawn, Thomas Sampson, and Bilal Zia. 2011. "Prices or Knowledge? What Drives Demand for Financial Services in Emerging Markets?" The Journal of Finance 66(6): 1844-67.

     

    Financial Literacy and Privatized Social Security in Mexico

    The study is designed as a survey with an embedded experiment and took advantage of Mexico's privatized social security system, which requires workers to choose their retirement investment funds (AFOREs) from an approved list.  This research project will collect detailed survey data and implement a series of field experiments in order to further understand the factors that determine workers' investment choices. The survey will collect information on financial planning, financial literacy, and investor perceptions of the privatized social security market.

    The survey will also contain two field experiments. The first will examine if survey participants are more likely to switch funds when provided with transparent information on the fees each AFORE charges. The second will test if financial literacy can be taught by providing simplified information on the importance of compounding interest, coupled with information about fees charged by the AFORE.  The survey results will allow for estimates of the impact of each piece of information on fund choice and sensitivity to fees. This information can be combined with information on market-level responses by AFOREs, with regard to their fees and total number of investors.

    If most people (regardless of income) choose funds to minimize fees, AFOREs will compete on price.  But if more people choose based on brand names or convenience, then funds will be less concerned with price and more concerned with brand promotion.  Previous research has suggested that  more-educated consumers choose funds to minimize fees, while less-educated consumers choose funds based on brand name or convenience.  Because lower income individuals are likely to have less education, market outcomes may lead to lower net returns for low-income households.

    Since social security is intended to be a safety net that provides income in old age to all citizens, differences in individuals' investment behavior (and firm response) across demographic groups is critically important for understanding the impacts of privatization on income distribution.

    Challenges in Banking Poor in Rural Kenya

    Policy Issue: 
    Access to basic banking services in sub-Saharan Africa remains limited, and lags far behind other parts of the developing world. Such limited access could potentially have important repercussions on people’s lives. If lack of access to a formal bank account makes it more difficult for people to save, they will be unlikely to have enough saved up to cope with unexpected emergencies such as an illness in the household. When such shocks occur, rather than withdraw money or take a loan from the bank, people might have to take much costlier actions, such as cutting back on food consumption or removing their children from school. Lack of banking access may also make it difficult for people to save up large sums or obtain credit for start-up costs for a business, agricultural inputs, or even preventative health products like anti-malarial bednets. Over the past decade, there has been a significant push to understand these impacts more fully and to explore strategies to expand access. Comparatively little attention has been paid to the demand side—why people may choose to stay out of the formal banking system.
     
    Context of the Evaluation: 
    In western Kenya, large bank branches are located primarily in major towns, often leaving rural villages with very few options. Villages in the study sample have two options: a “village bank,” owned by share-holding villagers and affiliated with a microfinance organization, and a partial-service branch (essentially a sales and information office with an ATM) for a major commercial bank. Both banks have substantial minimum balance requirements and withdrawal fees, and the village bank also has an account opening fee. The village bank does not pay interest on deposits, and neither does the commercial bank, at least for the poor (interest is only paid if the account balance exceeds 20,000 Ksh, or about US$210).
    While both the village bank and the commercial bank offer credit products, the terms for borrowing vary quite a bit across the two institutions. The village bank requires the formation of a group of at least five people who approve the purpose and amount of each other’s loans, and who serve as mutual guarantors. To take out a loan, borrowers must purchase a share (valued at 300 Ksh each, or US$3.20) in the bank, and are then eligible to borrow up to four times the value of shares owned at an interest rate of between 1.25 and 1.5 percent per month. The commercial bank grants microloans to existing businesses or individuals who have had an account at the commercial bank or with another commercial bank for at least 3 months. Two guarantors and full collateral are required for each loan, which must be repaid within 6 months, at an interest a rate of 1.5 percent per month. 
     
    Details of the Intervention: 
    To better understand the demand for formal financial services, researchers conducted a randomized evaluation in two phases. In the first phase, 55 percent of the total sample of 989 households was randomly offered a voucher for a free savings account at either of the two local banks. Researchers paid the account opening fees, provided the minimum balance, and arranged for the banks to simplify the account opening procedures for study participants, but did not waive the withdrawal fees. The vouchers were delivered to people in their homes, at which time field officers explained how the bank and the account worked, and how to redeem the voucher.
     
    Nine months later, among those who had not received the savings intervention, half were randomly selected to receive information about local credit opportunities. Trained staff visited these individuals at home and delivered a detailed script explaining the rules and procedures for obtaining a loan from either of the two local institutions. Among those who had received the savings intervention previously, half were selected to receive the same financial information script as well as a voucher redeemable for one free share at the village bank, thereby removing one of the most significant barriers to getting a loan. 
     
    A background survey collected information on demographic characteristics of the household, sources of income, as well as access to financial services, knowledge and perceptions of available financial services, and saving practices more generally. Nine months after the start of the savings intervention, a survey was administered to a randomly selected half of the sample, asking respondents open-ended questions about their current savings practices, perceived barriers to saving, and perceptions of the various saving mechanisms available to them. For those who had received an account voucher but had not redeemed it, the survey also asked why they had not opened an account. The survey also included a number of questions about familiarity with and interest in local credit options.
     
    Results and Policy Lessons: 
    At baseline, knowledge of banking options was very limited—only 60 percent of adults knew of the bank branches in the area and almost no one knew the fee schedule for account opening or the conditions for applying for a loan.
     
    Savings intervention: While overall take-up of the savings account was 62 percent, only 28 percent of those who opened an account made two or more deposits in the 12 months after account opening. These results suggest that entry costs—be it the cost of acquiring information, the opening fees, or the administrative hassle—are only part of the explanation of the low banking rates observed in the sample. Qualitative surveys with respondents indicate that the most common concerns with available savings mechanisms were risk of embezzlement, unreliable services, and transaction fees.
     
    Credit intervention: Though the vast majority of respondents took the vouchers when offered, only 40 percent redeemed them and only 3 percent had even started the process of applying for a loan 6 months later. Evidence from qualitative surveys on barriers to borrowing suggests that the fear of losing one’s collateral if one cannot repay the loan is the primary deterrent. 
     
    Overall, the results suggest that simply expanding existing services is not likely to massively increase formal banking use among the majority of the poor unless quality can be ensured, fees can be made affordable, and trust issues are addressed. 
     
    Related Papers Citations: 
    Dupas, Pascaline, Sarah Green, Anthony Keats, and Jonathan Robinson. "Challenges in Banking the Rural Poor: Evidence from Kenya's Western Province." NBER Working Paper #17851, Cambridge, February 2012.

     

    Mobile Commitment Savings in Rwanda

    This study examines a mobile money product innovation that allows customers to restrict access to a portion of their funds until a pre-specified date in the future. The product, called “Cash Bloqué,” is a commitment savings device that builds on the success of mobile money transfers by offering clients a way to lock away their money for a period of time. Using a randomized evaluation, this study will test the impact of a text-message marketing campaign and financial incentives to encourage take-up and usage of the product.
     
    Policy Issues:
    Saving money is difficult. Often, for example, individuals may put off saving until a future date. Once that date arrives, however, they may delay saving again in favor of more immediate expenses. For many, such time-inconsistent behavior, along with other factors like forgetfulness and social pressures, present an obstacle to savings.
     
    Commitment savings accounts are a simple and effective way to help users overcome many of these behavioral and social barriers and stick to their savings plans. By allowing users to restrict access to their funds until they reach a pre-determined savings target, commitment accounts can help individuals save towards life goals and large, lump sum purchases. Can this type of account structure be adapted to a mobile money platform? If so, what is the best way to promote its use? What are the main savings goals of those who use the new product?
     
    Context:
    In Sub-Saharan Africa, where 24 percent of individuals don’t have formal bank accounts , mobile money is beginning to provide previously under-banked individuals with access to financial services.1 Mobile money allows users to send, receive, and store money via password-protected accounts on their mobile phones, making it a potentially safe and convenient alternative to many informal financial services. In Rwanda, Millicom, which operates the Tigo mobile network, recently developed a commitment savings product for its mobile money service. The product, called “Cash Bloqué,” allows users to restrict access to a portion of their funds until a user-specified date in the future. Researchers are working with Millicom to develop an SMS marketing campaign and bonus scheme to promote the product in Kigali, where Tigo mobile money agents are especially concentrated.
     
    Description of Intervention:
    In partnership with Millicom, researchers are testing if the Cash Bloqué product can help users meet their savings goals. Using a randomized evaluation, this study will also help map demand for the product and determine if SMS marketing messages are effective at promoting use of the product. A random subset of active Tigo mobile money subscribers in Kigali will be randomly assigned to one of four marketing categories, each designed to appeal to a different saving motive, or a comparison group:
     
    1. Saving for investment: Users in this group will receive SMS reminders to save for capital to either start or grow their business, or buy land.
     
    2. Savings for durable goods: Users in this group will receive SMS reminders to save for home improvement, home repair, or buying furniture.
     
    3. Savings for shocks: Users in this group will receive SMS reminders to save for financial emergencies.
     
    4. Savings for regular expenses: Users in this group will receive SMS reminders to save for regular expenses, such as mandatory health insurance, school fees, rent, and foreseeable events like Christmas.
     
    5. Comparison group: Users in this group will not receive any SMS messages.
     
    Immediately after the marketing messages are sent to eligible customers, a subset will be randomly chosen to receive a bonus payment related to their Cash Bloqué savings. For half of the bonus recipients, the payment will be added to their account balance when they deposit money into the account. For the other half of recipients, the bonus will be framed as an added return on their savings and will be paid out on top of the customers’ account balances when they receive their money.
     
    Administrative data on the number, frequency, and size of Cash Bloqué transactions will be combined with data from household surveys to measure participants’ savings and consumption patterns, as well as their ability to meet savings goals. Together, this data will allow researchers to assess which marketing messages and bonus schemes are effective at promoting the use of the Cash Bloqué product and how the product affects savings behavior.
     
    Results:
    Results forthcoming.
     
     
    1The World Bank Group. 2011. "Global Financial Inclusion (Global Findex) Database." Available at: http://datatopics.worldbank.org/financialinclusion.
     

    Savings Devices and Weather Insurance for Farmers in Senegal and Burkina Faso

    Farmers in sub-Saharan Africa, especially those in the Sahel region, face a wide range risks to their welfare and livelihoods, such as drought, price fluctuations and family illness.  In this study in Burkina Faso and Senegal, researchers evaluate the impact of weather insurance and three savings devices on a variety of investment and welfare outcomes, and assess which products are most effective at enabling individuals to manage risk. 

    Policy Issue:

    Farmers in many developing countries are subject to a multitude of hazards, from droughts, to price dips, to illness. In West Africa, for example, almost every rural household manages farmland and is exposed to the risk of unpredictable rainfall.[1]Research indicates that poor, rural households are unable to fully insure against such shocks,[2] and that an inability to manage risks have long-run welfare implications.[3] While there is a fast-growing policy interest in offering financial products to help rural households manage risk, the evidence is still scant as to which products are the most effective.

    A combination of financial products may allow households to best manage multiple shocks. After all, while weather insurance may help rural households manage the impact of widespread drought, it will not help a farmer manage losses localized to his fields. Similiarly, improved access to savings accounts may allow households to quickly respond to unexpected illness, but it will have little value in helping households manage large or repeated shocks, like drought.

    This study contributes to a fast-growing body of research on the demand for, and impact of, financial instruments that help households manage risk.  

    Context of the Evaluation:

    The Sahel, the belt of land that lies along the southern edge of the Sahara desert, is one of the poorest and most vulnerable regions in the world. With low rainfall, frequent droughts, floods, and now, desertification, the region is a very a difficult and risky place to farm. Yet agriculture is the main source of livelihood for the majority of people in the Sahelien countries of Burkina Faso, Chad, Mali, Mauritania, Niger and Senegal. Not surprisingly, farming families in this region are prone to food insecurity and malnutrition.[4] Most participants in this study cultivated less than six hectares of land.

    Details of the Intervention:

    To evaluate the impact of four different financial products on households, and compare the effectiveness of weather insurance and savings devices in achieving welfare gains, researchers carried out a randomized evaluation with approximately 1,000 individuals in rural areas of Senegal and Burkina, specifically in the Department de Kaffrine (Senegal) and around Bobo-Dioulasso (Burkina Faso).

    This evaluation was conducted with 14 rotating savings and credit associations (ROSCAs) and 17 farmers’ groups. ROSCAS had to hold regular meetings in order to be included in the sample. ROSCAS in both countries were composed entirely of women, while farmers groups were entirely male in Senegal, and mixed in Burkina Faso.

    The study design resembled an experimental game, in that the activities simulated real life choices—in this case, selecting financial products. The study design was not game-like in that the financial products used during the game were real, and they were paid out as real financial products would be.

    Twenty participants at a time were invited experimental sessions. At the sessions, participants were provided with a 6,000 CFA (about $12).[5] After an information session, participants were randomly allocated to one of four groups, through a public lottery. In each randomly composed group, one of the four financial products was described and then offered to participants. Participants were asked to decide how much of their 6,000 CFA they wanted to take as cash and how much they wanted to put into the product that they had been offered.

    The four financial products offered were as follows:

    1)    Insurance: An index insurance product providing protection against too little rainfall for the main crop in the area (groundnuts in Senegal, maize in Burkina Faso). In both countries the index-insurance product was a product that was being sold by local insurance companies with the support of Planet Guarantee.

    2)    Agricultural investment savings at home: Saving for agricultural input purchases at the input fair. Savings were earmarked through placing them in an envelope which was then sealed and stamped with the purpose of the savings stated on the front. The envelope would be kept at home by the participant and there was nothing, other than the earmarking, that prevented them from using the savings for other purposes.

    3)    Agricultural investment savings with the group treasurer: Saving for agricultural input purchases at the fair. However in this treatment savings were not kept at home by the participant, but rather they were managed by the treasurer of the ROSCA or farmers group to which the participant belonged. To withdraw from the savings, the participant would have to go through the treasurer. To withdraw money the participant would have to take their savings passbook to the treasurer and the treasurer will record the data, amount withdrawn and purpose and both participant and the treasurer sign it. The treasurer of the group was encouraged not to give out the money before input day. Interest on savings was paid if the full amount deposited was still with the treasurer on the day of the input fair. The interest rate was varied across experimental sessions.

    4)    Emergency savings with the group treasurer: Saving for emergency expenses. Again, in this treatment savings were managed by the treasurer of the ROSCA or farmers group to which the participant belonged. To withdraw from the savings, the participant would have to go through the treasurer. To withdraw money the participant would have to take their savings passbook to the treasurer and the treasurer will record the data, amount withdrawn and purpose and both participant and the treasurer sign it. The treasurer of the group was encouraged not to give out the money unless the participant needs money for an emergency. Interest on savings was paid if the full amount deposited was still with the treasurer on the day of the input fair. The interest rate was varied across experimental sessions.

    One month after the original experimental session, participants attended fairs where they were given the option of purchasing inputs. Participants in treatments 3 and 4 were provided with the remaining money that had been in savings with the group treasurer, and any interest that was due was paid. Participants in treatment 4 (savings for emergencies) were also offered the opportunity to save again with the group treasurer for further safe keeping over a three-month period at the same interest rate as they had been offered earlier.

    The above study design enabled researchers to examine the following: the effectiveness of insurance versus targeted savings in encouraging productive investment and improving welfare; the effectiveness of insurance versus savings in managing risk and encouraging investments in risky agricultural production; the difference between saving for emergencies and saving for investment in affecting ability to manage risk and investment outcomes; the role of commitment in savings products in ensuring outcomes; gender differences in take-up and impact of these financial devices. Outcomes were measured one month and six months after offering the financial devices (during the growing season and after harvest).

    Results and Policy Lessons:

    Results forthcoming.


    [1] Karlan, Dean, Isaac Osei-Akoto, Robert Osei, and Chris Udry. "Examining underinvestment in agriculture: Measuring returns to capital and insurance." à paraître (2011).

    [2]Townsend, R.M. 1994. Risk and Insurance in Village India." Econometrica: Journal of the Econometric Society, 62(3): 539-591.

    [3]Dercon, Stefan. "Growth and shocks: evidence from rural Ethiopia." Journal of Development Economics 74, no. 2 (2004): 309-329.

    [4] World Bank. “Transforming Agriculture in the Sahel.” Available at: http://www.worldbank.org/content/dam/Worldbank/document/Africa/transforming-agriculture-in-the-sahel-background-note-english.pdf

    Financial Inclusion for the Rural Poor Using Agent Networks

    Many people in developing countries rely on risky and expensive methods of managing their assets. In this study, researchers are evaluating whether lowering the cost of accessing savings accounts through local point-of-sale enabled agents and providing financial literacy training impacts the saving and consumption patterns of cash transfer beneficiaries in rural Peru.

    Policy Issues:
    In developing countries, poor households often do not have access to formal financial products or utilize bank accounts to save for the future. Without a safe and secure way to save, many people rely on riskier and more expensive methods of managing their assets. Increasingly, government-to-person cash transfer programs are addressing this issue by providing beneficiaries with formal savings accounts through which they disburse the cash transfers. In Peru, evidence from one such program suggests that very few beneficiaries use their accounts to save, preferring instead to withdraw the entire cash transfer immediately after it is made. Beneficiaries may prefer to withdraw their funds all at once due to the time and cost required to travel to a bank branch or ATM to access their account, especially in rural areas where there is limited banking infrastructure.
     
    Would reducing the cost of accessing formal bank accounts lead beneficiaries to use their accounts to save more of their cash transfers or change their spending patterns? This evaluation explores how the introduction of branchless banking affects the costs of accessing cash transfers and how beneficiaries respond to reduced transaction costs. 
     
    Context:
    The Peruvian Ministry of Development and Social Inclusion operates a conditional cash transfer program called JUNTOS. The program provides a bi-monthly transfer of 200 Peruvian soles, approximately US$70, to 660,000 impoverished female heads of households who are either pregnant or have children under 19 years of age. The transfers are conditional on households providing access to education, nutrition, and health services for their children. The state bank, Banco de la Nación, opens a savings account for all JUNTOS beneficiaries. While 67 percent of users collect payments through these accounts (as opposed to delivery via armored transport), only 18 percent of users have a bank branch in their district. As a result, most users must collect their payments from a branch in a neighboring district. Preliminary analysis of government data suggests that users  commute on average over five hours and spend 10 percent of their payment on transportation to receive their transfer. Facing such steep costs, most users limit the number of trips they make to a bank branch and withdraw their payments all at once when they do make the trip. Transportation costs are often raised on payment days and markets with an abundance of temptation goods are typically organized around bank branches, leading to a large amount of the transfer to be spent on the day of payment. This pattern of infrequent and relatively large withdrawals may make it difficult for many beneficiaries to use their JUNTOS accounts to save, even if they wish to do so. In an initial survey, 31 percent of JUNTOS beneficiaries report having some type of monetary savings, but only 1 percent of beneficiaries do so through their JUNTOS account. 
     
    Description of Intervention:
    Researchers are conducting a randomized evaluation to explore the impact of allowing JUNTOS beneficiaries to collect their payments though branchless banking agents. In the branchless banking system, local bank agents, typically shopkeepers, serve as deposit and withdrawal points for account holders to access their funds with debit cards. The agent based network will allow the national bank to increase the number of withdrawal points for JUNTOS users, reducing transportation costs and potentially giving users a greater degree of access to their accounts. If this is the case, users may begin to use their account to save more of their JUNTOS payments, making smaller and more frequent withdrawals. 
     
    In order to evaluate the effect of branchless banking, a sample of 60 sub-regional districts, each with approximately 300 JUNTOS beneficiaries, will be randomly assigned to one of three groups. In the first group, branchless banking agents will be established in each district, allowing beneficiaries to access and withdraw funds from their JUNTOS accounts. In the second group, branchless banking agents will be introduced and users will also receive basic financial literacy education and training on accessing their accounts through branchless banking agents. The third group will serve as a comparison group, where branchless banking agents will be introduced only after the twelve-month evaluation period. One year after banking agents are introduced, the researchers will collect information on savings and consumption behavior from household surveys. The study will also incorporate administrative account usage data from Banco de la Nación and the JUNTOS program to examine how beneficiaries use their accounts when they can access them through branchless banking agents.
     
    Results:
    Results forthcoming.

    The Impact of Business Training and Capital for High Potential Entrepreneurs in Colombia

    Small and medium enterprises (SMEs) are thought to be important drivers of growth in developing economies, but entrepreneurs in these countries face many barriers, including poor access to training, finance, and business networks. In Colombia, Fundación Bavaria’s “Destapa Futuro” (Open the Future) program identifies promising enterprises and provides them with a suite of financial, technical, business, and training resources. Researchers found that the trainings did not affect key business outcomes, such as sales and profits, but helped entrepreneurs to expand their business networks. 
     
    For additional information on current SME Initiative projects, click here.
     
    Policy Issue:
    Small and medium enterprises (SMEs) are thought to be important sources of innovation and employment in developing countries, due to their flexibility in responding to new market opportunities and their potential for growth. However, entrepreneurs face a number of barriers to expanding their businesses and employing more workers, including constrained access to credit, lack of management skills, and unfavorable government regulation. Business training, capital, and mentorship are possible tools that could help SMEs overcome these barriers, but existing evaluations of business training programs and capital injections for entrepreneurs have found mixed results. Additional research is needed to understand how training programs should be designed and delivered in order to best help entrepreneurs develop their operations and foster economic growth.
     
    Context of Evaluation:
    Fundación Bavaria, a foundation started by one of the largest beverage companies in Colombia, works to foster entrepreneurship in Colombia through an intensive, year-long program called “Destapa Futuro” (Open the Future). The program uses a competitive process to identify entrepreneurs with promising business plans or small start-ups and provides them with business training, capital, technical advice, and the opportunity to network with investors. Since 2005, Bavaria has spent close to $10 million on the program, trained thousands of entrepreneurs, and financially assisted more than 200 businesses. 
     
    Destapa Futuro targets relatively experienced and educated entrepreneurs. The average participant was 36 years old, had 16 years of education, and had four years of experience as an entrepreneur. Seventy-three percent were male. During the fifth round of Destapa Futuro in 2010-2011, these participants received business training from two organizations that support entrepreneurs, the Centro de Formación Empresarial (CFE) and Endeavor Colombia. 
     
    Description of Intervention:
    Researchers evaluated Destapa Futuro’s impact on business outcomes, the difference between the two organization’s different training strategies, and the relative impact of receiving prizes in cash or in kind. In order to participate in the program, entrepreneurs completed an online application, which included questions on business characteristics, leadership potential, experience in business administration, and potential social impact. From the database of 8400 applications 475 candidates, half of them with business plans and the other half with existing start-ups, were selected and ranked. 
     
    This pool of 475 entrepreneurs was divided into three groups:
    • The top 25 entrepreneurs all received the Endeavor training. Because their participation in the training program was not randomly assigned, they were not part of the study sample.
    • The following 100 entrepreneurs were randomly assigned to receive training from either Endeavor or CFE.
    • The remaining 350 entrepreneurs were randomly assigned to either the CFE training group or the comparison group, which did not receive any training.
    Both the Endeavor and CFE trainings included modules on financial management, marketing and business plan development. Endeavor offered an in-person training, delivered in two two-day sessions. All classes had a maximum of 20 entrepreneurs per trainer. In addition to lectures, each entrepreneur participated in several one-on-one discussions with program coordinators, trainers and mentors. CFE used a combination of online learning and in-person classes.  In the online component, which consisted of four modules over one month, participants were assigned to groups of 18-21 students. They completed online modules with homework assignments, participated in online forums, and collaborated via email and phone. The entrepreneurs who completed homework and participated in forums were eligible for the in-classroom training, which consisted of four days of classes with the same tutor assigned during the online training. 
     
    After the CFE and Endeavor trainings were completed, the 100 entrepreneurs with the best business plans and course performance were selected to receive an additional coaching session in preparation for the business plan presentation that would determine the prize winners. The coaching session provided contestants with feedback on content and style of their presentations. After the presentations, the best 60 entrepreneurs were awarded a prize to fund their business.
     
    In order to test how having the flexibility to choose how to spend the prize money affected business outcomes, half of the winners were randomly assigned to receive cash, and the other half received an in-kind prize. Cash prizes ranged from about 5,600 USD to 56,000 USD (10-100 million COP). Fundacion Bavaria determined the nature of the in-kind prizes based on the entrepreneur’s requests and available resources, and they included business equipment, marketing and advertising materials and other business investments.  Forty winners were also randomly selected to receive mentorships with Bavaria executives, who listened to business plan presentations, gave advice, and suggested potential contacts.
     
    Results and Policy Lessons:
    Impact on business outcomes: Entrepreneurs who participated in the CFE training did not have higher sales, costs, profits or number of employees than the entrepreneurs who did not receive any training.  Entrepreneurs in the CFE training were just as likely to start a company as entrepreneurs who did not receive training. Similarly, entrepreneurs who participated in the Endeavor training did not have significantly different business outcomes compared to those who participated in the CFE training.
     
    One of the goals of the Destapa Futuro program was to help entrepreneurs expand their business networks by meeting fellow entrepreneurs, trainers and mentors. Entrepreneurs in the CFE training who did not have existing start-ups were more likely to secure a contact with a partner, ally or investor than entrepreneurs who did not participate in the training. The Endeavor training was more beneficial for network expansion for entrepreneurs with existing start-ups, while the CFE training was more beneficial for entrepreneurs with business plans only.
     
    In-kind versus cash prizes: Compared to recipients of cash, winners of in-kind prizes did not have significantly different sales, profits or costs. The type of prize also did not influence investment choices of entrepreneurs, with the majority investing their winnings into machinery and equipment. Since the type of prize did not affect outcomes of entrepreneurs, and it was logistically easier and faster to disburse cash prizes, in this context cash may be a preferred option.
     
    In the sixth round of Destapa Futuro, Bavaria Foundation modified the program to be more financially sustainable while providing more personalized support to entrepreneurs.

    Shopping for Financial Products in Peru

    Financial products have the potential to help the poor, yet most financial institutions are driven by commercial goals, and their staff may not be incentivized to offer products most suitable to low-income clients. In this study in Peru, participants visited banks and pretended to be shopping for financial products in order to gather information on how bank staff treat different types of clients. Policymakers aim to use the information from this study to improve consumer protection policy and practices for financial products and services in Peru.

    Policy Issue:

    Financial institutions, driven by commercial interests, often offer expensive products to clients first, and staff are rarely incentivized to provide information about ways to avoid fees or access cheaper products. Meanwhile, many clients lack the necessary understanding of financial products to engage in sound financial decision-making; it requires a certain level of financial knowledge to avoid paying fees, or to ask if a cheaper product is available, even when it is not offered. Less informed customers may not be able to navigate this territory to find products that best suit their needs.

    Indeed, research suggests that lack of transparency and low quality of information provided by financial institutions has negative consequences for low-income consumers. In a related study, for example, staff at financial institutions failed to voluntarily provide much information about avoidable fees, especially to people lacking financial knowledge, and clients were almost never offered the cheapest product.[1]

    Many governments around the world have tried to address this problem by introducing legislation to improve customer protection policy and practices related to disclosure and transparency for financial products. This study aims to contribute evidence for such policymaking in Peru and beyond.

    Context of the Evaluation:

    The World Bank and Peru’s banking and insurance supervision agency, Superintendencia de Banca, Seguros, y AFP (SBS), are working to improve consumer protection policy and practices in the Peruvian market for financial products and services. This includes work to improve product disclosure and transparency for credit and savings products.  These institutions are therefore seeking high-quality data on existing practices, notably the quality and type of financial information and advice offered to low-income individuals by Peruvian financial institutions that provide savings, individual term credit products, and credit cards. In a broader scope, these institutions aim to improve consumer protection policy and practices in the Peruvian market for financial products and services, particularly by enhancing product disclosure and transparency for credit and savings products.

    Details of the intervention:

    To evaluate whether financial institutions provide different treatment to clients based on their profile, and if so, what the differences in information are, researchers carried out an audit study of financial institutions in urban areas of the northern, southern and central regions of Peru, specifically in the cities of Lima, Puno, and Piura.

    The study had two phases. First, low-income individuals carried out 529 visits to financial institutions where they pretended to be shopping for different financial products. They either requested a savings account, a term credit product, or a credit card. Prior to conducting the shopping exercises, the participants received two days of training on how to act out their assigned consumer profile. They followed scripts that entailed using language and behaviors that signaled high or low levels of financial experience. When they visited the institutions­­—which included commercial banks, lending institutions and microfinance institutions.

    After the exercises, the participants completed questionnaires on what information was presented and in which forms, as wells as on their personal impressions of the quality of information, advice and customer service provided by the institutions.

    Mystery shoppers’ visits were intended to determine the types of information—verbal, physical and otherwise—institutions provide to low-income financial consumers. The participants act out the different consumer characteristics to enable researchers to examine any differences in how staff treat clients based on perceptions of the clients’ financial knowledge.

    In the second stage, surveyors carried out interviews with 62 credit officers, at institutions where the exercises had been conducted, to obtain information on the staff members’ socio-demographic characteristics, perception of clients, financial knowledge, and salary and incentives structure.

    Researchers will merge results from this study with findings from related studies in Mexico and Ghana.

    Results and Policy Lessons:

    Results forthcoming.



    [1]Giné, Xavier, Cristina Martinez Cuellar, and Rafael Keenan Mazer. "Financial (dis-) information: evidence from an audit study in Mexico." World Bank Policy Research Working Paper 6902 (2014). Available at:

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2445748

     

    Financial and Informational Barriers to Migration in the Philippines

    In 2009 well over a million Filipino citizens worked overseas, collectively sending home billions of dollars in remittances. The majority of overseas workers come from urban areas. This project explores some of the barriers to migration for rural inhabitants, such as lack of information, credit constraints, and the complex Philippines passport process.

    Policy Issue:
    Working abroad is one of quickest ways for individuals from developing countries to earn much higher incomes. The wage for performing the same job can differ by as much as a factor of ten between countries, and many families depend on remittances from relatives who have migrated abroad. Despite these benefits, relatively few citizens move abroad for work, perhaps because the idea of leaving their home country is unappealing, or they are not fully aware of the benefits of working abroad. Furthermore, those who want to migrate sometimes have difficulty finding a job, financing a trip overseas, or obtaining a passport.
     
    As a result, some governments are looking for ways to help citizens work abroad. When governments encourage their citizens to work abroad, they usually do so either by themselves or with the cooperation of destination countries. Some actions that governments can undertake unilaterally include providing citizens with information about migration, loan facilitation, and easing the international job-search process. If governments have the cooperation of governments or employers in destination countries, they can establish formal agreements to allow for the migration of specified numbers and types of workers. There is little empirical evidence on how effectively these kinds of policies create opportunities for international work and encourage people to migrate.
     
    Context of the Evaluation: 
    The Government of the Philippines has extensively encouraged international migration. The Philippines has 49 bilateral migration agreements with 25 destination countries. Over 2 million Filipinos leave for work overseas each year, and remittances total more than US$25 billion, nearly 10 percent of the country’s GDP. Policymakers in Bangladesh, India, and Sri Lanka have pointed to the Filipino government as a model for how to promote and regulate migration.
     
    This evaluation took place in Sorsogon province, which has relatively few migrants compared to other areas in the country. The province is 10–12 hours from Manila by bus, where most international labor recruitment takes place. Prior to the start of the study, participants earned approximately US$1,900 per year, similar to the country’s GDP per capita of US$2,000. They were fairly well-educated (69 percent completed high school), which would qualify them for many overseas jobs, and 34 percent reported interest in working abroad.
     
    Description of Intervention: 
    Researchers tested the impact of several interventions to reduce informational, job search, and documentation barriers to working overseas. In total, there were five different interventions, similar to the efforts that the Filipino government had already undertaken:
     
    1.    Application information that detailed typical overseas costs, the steps needed to
           apply for work abroad, an advertisement to enroll in a job-finding website, and a
           list of ways to avoid illegal recruitment.
    2.    Financial information that listed typical placement fees for working abroad and
           a list of financial companies that could provide loans to cover placement fees.
    3.    Passport information that explained the importance of having a passport and
           listed the steps necessary to obtain a passport.
    4.    Website assistance that allowed participants to enroll in the job-finding website
            using a paper form, which project staff uploaded to the website.
    5.    Passport assistance that invited respondents to participate in a program that fully
           subsidized the typical costs of applying for a passport and provided staff assistance
            in navigating the process.
     
    Researchers randomly selected 42 barangays (the smallest administrative division in the Philippines) from six municipalities in Sorsogon for the evaluation. Approximately 26 percent of households in each barangay were randomly selected for interviews, and one adult in each household was interviewed, leading to a sample of 4,153 adults ages 20-40 who had never worked abroad. Participants were then randomly assigned to a single intervention, a combination of interventions, or to a comparison group that did not receive any of the five interventions. The randomization resulted in a total of 15 distinct groups.
     
    Results and Policy Lessons:
    Although some interventions increased the number of individuals taking steps leading toward working abroad, such as searching for jobs or applying for passports, no intervention or combination of interventions significantly increased the migration rate. These results suggest that unilateral policies that aim to provide information, job search assistance, or documentation are not sufficient on their own to increase international migration.
     
    Providing information did not result in higher rates of job search or migration. The job search rate was the same (about 5 percent) for participants given all three information interventions (application, financial, and passport information) and those in the comparison group. The migration rate was also the same (about 1 percent) for both of these groups.
     
    Providing assistance in using a job-search website increased the number of participants who searched for work abroad but did not lead to additional migration. The job-search rate for participants who received website assistance, in addition to the three information interventions, was 15.7 percent, about three times higher than the comparison group. However, these participants were no more likely to migrate. Among participants who indicated that they were interested in migrating during the initial interview, receiving information and website assistance increased the job search rate by 19.6 percentage points (to 30.6 percent) and increased the likelihood of attending an interview by 7.7 percentage points (to 11 percent), but this did not result in a significant increase in the number of job offers or the migration rate.
     
    Providing passport assistance increased the number of individuals who had a passport, but did not increase migration. Receiving passport information and assistance increased the probability of having a passport by 12.6 percentage points (to 17.1 percent). Receiving all three information interventions, plus passport assistance, similarly increased the probability of having a passport by 12.5 percentage points (to 17 percent). Yet, individuals in these groups were no more likely to migrate than those in the comparison group.
     
    Even the most intensive treatment did not lead to more migration. The job search rate among individuals who received all five interventions was 21.7 percent, an increase of 16 percentage points over the comparison group. These participants were also more likely to be invited to an interview, attend an interview, and receive a job offer. Nevertheless, the migration rate among this group was no different from the comparison group.
     

    Evaluating the Efficacy of School Based Financial Education Programs

    Could financial literacy training for children lay a foundation for good financial decisions and a better quality of life in adulthood? If so, what type of training works best? In this study, IPA partnered with Aflatoun, a Dutch non-governmental organization, to evaluate the impact of two forms of financial education on primary school children across Ghana. 

    Policy Issue:

    Research on financial knowledge and behavior indicates that individuals in both developed and developing countries around the world lack adequate knowledge to make informed financial decisions. In response to evidence that financial literacy is correlated with well-being, many service providers, donors, and policymakers have begun including financial training and business education as part of their broader anti-poverty strategies. Intuitively, financial education provides useful tools to people of all ages, yet empirical evidence for this impact is meager and often mixed. This project tests two financial education curricula for primary school students. Specifically, it measures the impact of financial education on student behavior attitudes, and outcomes.

    Context of the Evaluation:

    Saving and finances are part of daily life for many youth, yet traditional school curricula often overlook the specific issues and challenges students encounter with money. This curricular gap represents a missed opportunity for students and teachers. Aflatoun, a Dutch non-governmental organization providing social and financial education to 540,000 children in 33 countries, operates a voluntary after school club in Ghana for primary and junior high schools. Aflatoun uses a uniquely designed “social and financial education curriculum” to improve children’s saving habits as well as financial attitudes and self-esteem. Aflatoun’s training on handling money, saving on a regular basis, and spending responsibly aims to teach children, at a young age, lessons and behaviors that they will carry with them throughout their lives.

    Aflatoun operates in collaboration with local partners to implement its programs. Two project partners in Ghana - the Women and Development Project (WADEP) and the Netherlands Development Organization (SNV) - trained instructors and managed program implementation. SNV Ghana worked with three other implementing partners in two regions to train teachers and monitor the implementation of clubs: Berea Social Foundation (Western Region), Support for Community Mobilization Projects and Programs  (Western Region), and Ask Mama Development Organization (Greater Accra Region).

    Details of the Intervention:

    The study included 5,000 primary school students aged 9 - 14 in 135 public schools in semi-urban and rural Ghana, including 30 schools in Greater Accra, 60 in Volta, and 45 in Western District. One-third of the schools in each region were randomly assigned to each of three different groups: the Aflatoun program, Honest Money Box (HMB) intervention, or a comparison group without treatment.

    The Aflatoun curriculum includes lessons about planning, budgeting, saving, proper spending, as well as self-esteem building exercises. It uses songs, games, and worksheets, which put children at the center of the learning process. Aflatoun also adapts its messages and activities to the context of the countries in which it operates, focusing on cultural heritage and community in order to foster a collective sense of empowerment among participant children. The HMB intervention, in contrast, is solely focused on financial education and is designed to provide a comparison for Aflatoun’s unique social and attitudinal curriculum. IPA developed the HMB intervention as a group savings scheme with a financial literacy curriculum. Some of the topics covered in the curriculum include: What is Money?, Saving and Spending, Planning and Budgeting, and Entrepreneurship, as well as lessons in how to use the Money Box, a lockbox that stores group savings.  

    To implement the two programs, local partner organizations trained approximately 200 teachers (two teachers in each selected school). Teachers instructed two multi-grade clubs, with an average of 54 students per club, and delivered the assigned curriculum, in addition to providing a secure storage space for the money saved, generally in the teacher’s locked office. Clubs met, on average, once a week after school at a time decided by the members. Students saved money from their pocket change and recorded transactions on individual passbooks. IPA and partner organizations monitored the teachers to ensure that implementation met pre-determined standards.

    The evaluation was conducted over the course of one school year.  Between 20 and 40 children per school were chosen to be surveyed.. The baseline survey  was conducted in September 2010 and the endline in August 2011. The surveys collected data on financial well-being of students and their families, cognitive function, and perspectives on savings and time and risk preference. The endline survey captured the same information as the baseline, in addition to a financial education endline assessmentand a psychosocial module to understand students’ outlooks and levels of self-control.

    Surveys: 

    The surveys used are available here in .doc format:

    Baseline Student Survey

    Endline Student Survey

    Aptitude Assessment

    Shop Games

    Results:

    Presentation from the “Impact and Policy Conference” in Bangkok, September 2012.

    Analysis is ongoing, results forthcoming.

     

     

    Increasing the Development Impact of Remittances among Filipino Migrants in Rome

    In 2012, remittances from migrant workers to developing countries were roughly three times the total amount of global foreign aid, yet little is known about how to make these funds work better.[i][ii] Researchers in this study explored this in two ways: First, they introduced a financial product that enabled migrant workers to pay schools in the Philippines directly for their children’s or other relatives’ education. Second, they tested if giving migrants different degrees of control over how remittances are used for educational purposes made them more likely to send money home. Simply labeling remittances as funds to be used for education raised the amount of money migrants sent home substantially—by more than 15 percent—while adding the ability to directly pay the school only added a further 2.2 percent. 

    Policy Issue:

    Migrant remittances are one of the largest international financial flows to developing countries. They exceeded US$400 billion in 2012, which was roughly three times the amount of total foreign aid flows to developing countries that year.[i] However, little is known about how to maximize the impact of remittances. Studies have shown that spending on the education of relatives back home is one of the most significant expenditures for migrant workers and that remittances improve educational attainment of migrant’s children. Previous studies also suggest that financial products that provide migrants with greater ability to monitor and control how remittances are spent can lead them to send more money home. This study evaluates how migrants’ remitting behavior changes when they can label remittances to be used for education or directly transfer remittances to their child’s school back home. It also investigated the demand for a new financial product that allowed migrants to channel tuition payments directly to schools and to receive information about student performance.

    Context of the Evaluation:                                              

    The Philippines is one of the top recipients of officially recorded remittances, topped by only China and India, with Filipinos sending US$26 billion back home in 2013.[iv] From 1981 to 2011, approximately 1.8 million Filipinos migrated overseas—an average of 60,000 departures every year.[v] There are estimated to be approximately 113,000 Filipino migrants in Italy, remitting about US$500 million on average back to the Philippines each year. Nearly half of these remittances are for educational purposes. The majority of Filipino migrants who participated in this study were women and they primarily worked as domestic assistants in private residences. Their median monthly wage was €900 and the median amount of remittances was €380 per month. The median amount of remittances sent home for education each year was about €970. Almost 96 percent of participants remitted regularly in the last year and 72 percent sent money home every month.

    The intervention is a pilot to help inform the Philippine Association of Private Schools, Colleges, and Universities and the Bank of the Philippine Islands (BPI) on whether there is sufficient demand for a new financial product called “EduPay,” whether it can be profitable for BPI to offer this product, and whether it leads to increased financing for schooling in these transnational households. The EduPay product allows migrants to send tuition payments for their children or other relatives directly to schools back home and monitor their academic performance.  

    Details of the Intervention:

    To evaluate remittance behavior and demand for EduPay, researchers carried out games that tested participants’ remittance decisions in different scenarios and then they offered them the EduPay product.

    Participants were asked to play four games, with the order randomized, to test if their likelihood to remit changed under different circumstances. The games mimicked real life choices in which a migrant makes money and then has to decide how much to keep for herself and how much to give to family members back home. In the first game, migrants were entered into a lottery to win €1,000 and asked how much they would like to allocate any winnings between themselves and between people back home in the Philippines. In the second game, migrants were offered the same lottery but they were also given the option to label any of the amount shared as money for education. In the third one, migrants had both the option to label education remittances and to send the money directly to the student’s school. The fourth game was identical to the third, but if they chose to send money directly to a school, the migrant would also receive the student’s attendance and grade reports.

    Researchers hypothesized that the willingness of the migrant to use education labels and to send money directly to the school might differ with the information that their household in the Philippines received about the choice the migrant made. To test this, researchers randomly assigned the migrants into three groups, as follows:

    Private information: Migrants were told that the most closely connected household in the Philippines would not be informed of any of their decisions.

    Information sharing: Migrants were told that the household in the Philippines would be informed of all the choices they made.

    Social excuse: Migrants assigned to this group were told that, as in group two, the household in the Philippines would be informed of all choices made. However, if the migrant chose any of the EduPay options, the survey team would inform the household that a small donation to a Filipino community organization in Rome was made when the EduPay option was chosen.

    Finally, the migrants were offered the EduPay product, which gave them the opportunity to send tuition payments directly to schools in the Philippines from a BPI branch in Rome. EduPay also sent the migrant attendance records and grade reports from the child’s school so that they could better monitor their academic performance. In the study, implementation was strong and all EduPay transactions were executed successfully. Researchers then examined whether participants’ decisions in the games predicted their demand for the EduPay product.

    Results and Policy Lessons:                                                                                             

    The introduction of simple labeling for education raised remittances by more than 15 percent relative to migrants who were not offered the labeled or direct payment product. They sent about €708 of a possible €1,000 home relative to €615 in the comparison group. Labeling also increased the likelihood that migrants would remit at all by 4.6 percentage points. Adding the ability to directly send this funding to the school only added a further 2.2 percent. This suggests that migrants are prepared to remit more money when given the option to explicitly label some of this money for education purposes. Giving the migrant more control over how the money is actually spent, by transferring their remittances directly to the school, resulted in little additional increase in the amount of money they sent home.

    Furthermore, researchers found that behavior in this game was useful for predicting whether migrants would sign up for the EduPay product. Migrants who remitted more for education purposes in the game, and who remitted more with education labeling than without, were more likely to want to use the product. They also found that demand for EduPay was driven more by a demand for the ability to label remittances for education, than by the option that gave them the opportunity to control how the money was spent.

    The findings from this study are in line with recent evidence, which shows that simply labeling money for certain purposes can change spending and saving behaviors. The future challenge for researchers and policymakers is to identify how to implement these simple interventions most effectively. Given that remittance flows are so large, a proven approach to enhancing their development benefits could have substantial influence on policy.


    [i]Yang, Dean. "International Migration, Remittances and Household Investment: Evidence from Philippine Migrants’ Exchange Rate Shocks*." The Economic Journal 118, no. 528 (2008): 591-630.

    [ii]Edwards, Alejandra Cox, and Manuelita Ureta. "International migration, remittances, and schooling: evidence from El Salvador." Journal of development economics 72, no. 2 (2003): 429-461.

    [iii]The World Bank. “Migration and Remittances.”Last modified April 2014.

    [v]International Organization for Migration. “Country Report for the Philippines.” 2013. p. 50

     

    Dean Yang

    Donor response to aid effectiveness in a direct mail fundraising experiment in the United States

    People give to charity for different and multiple reasons. Understanding why people donate may help organizations improve their messaging to potential donors, increase their revenue, and conduct additional programming to achieve their mission. Researchers examined whether individuals gave more after receiving information about a charity’s impact. They found that providing potential donors with rigorous evidence about a charity’s effectiveness increased the likelihood of giving to a major U.S. charity for large prior donors, but decreased the likelihood of giving for small prior donors.
     
    Policy Issue:
    People give to charity for different and multiple reasons. Understanding why people donate may help organizations improve their messaging to potential donors, increase their revenue, and conduct additional programming to achieve their mission. However, there is limited rigorous evidence on what motivates people to give or which communication strategies are most effective for reaching out to potential donors.  While donors typically like the idea of giving to charities that are effective, people often donate for one or both of two reasons: (1) altruism, in which people donate with the intention of increasing social welfare, and (2) “warm-glow”, in which the act of donating itself provides enjoyment.
    According to this view, altruists would respond favorably to news about charities’ effectiveness by increasing their donations to the most effective ones. Alternatively, warm-glow donors may only value donating itself and may not respond to information about an organization’s impact. This study examines whether donors give more after receiving information about a charity’s effectiveness, as measured by randomized evaluations.
     
    Context of the Evaluation:
    Freedom from Hunger (“FFH”) is a United States based nonprofit organization that develops and promotes microfinance programs that pair financial services with other services such as business management, education, and health. In 2013, FFH received US$5.77 million in operating revenue and support, of which US$3.70 million came from individual donations.
    From 2002-2005, researchers conducted a randomized evaluation of a FFH program in Peru and concluded that it helped women improve business practices and generate more consistent revenue. Women who were offered a joint credit and education program had 16 percent higher profits in their businesses than those who were not, and they increased profits in months with low sales by 27 percent.
    Details of the Intervention:
    Researchers collaborated with Freedom from Hunger to examine whether providing individuals with information about the success of FFH’s programs as measured by a randomized evaluation motivated prior donors to donate more or more often. Researchers designed the evaluation to measure whether donors give for altruistic reasons (deliberate, effortful, and focused on impact) or for “warm-glow” (intuitive, effortless, and reactive).
    The experiment was conducted in two rounds as part of FFH’s regularly scheduled direct-mail fundraising campaigns. All participants were recent donors who had given at least once in the previous three calendar years. In the first wave, (June 2007), all individuals were sent a renewal letter that provided an update on one of FFH’s programs and requested donations. Subjects were randomly assigned to receive one of three letter types:
    1. Comparison group: individuals received only the renewal letter, with no added insert.
    2. Emotional appeal: individuals received an additional one-page insert with a personal story about one of the program’s beneficiaries and how FFH helped him or her.
    3. Effectiveness appeal: individuals received an identical insert with an altered final paragraph which instead mentioned that FFH had used “rigorous scientific methodologies” to measure the impact of the program and that the program helped women improve business practices and generate more consistent revenue.
    During the second wave of mailings (October 2008), FFH introduced a new letter template which explicitly cited Yale-affiliated researchers as the source of the statistics on the program’s effectiveness. Researchers collected data on whether the people who received a letter made a donation within five months of the mailing and how much they donated.
    Results and Policy Lessons:
    On the whole, providing information on a program’s scientific impact had no effect on whether someone donated or how much they gave. However, researchers found that information had a different effect on donation behavior depending on how much a donor had given in the past. Providing information about charitable effectiveness increased the likelihood of giving among large prior donors (those who had previously given US$100 or more), but decreased the likelihood of giving among small prior donors (those who had previously given less than US$100). Large prior donors, on average, gave US $12.98 more than the comparison group average of US $92.17, while donors of small gifts were 1.4 percentage points less likely to donate relative to the comparison group average of 27.5 percent. There was no significant change in the donation rate or amount of infrequent donors, perhaps reflecting the fact that frequent donors were more likely to read the letters than infrequent donors.
    Researchers hypothesize that larger donors were more driven by the impact of their donation, while smaller donors may have been deterred by the more deliberate, analytical message which may have distracted the letter recipient from the emotionally powerful messages that typically trigger donations. These findings are consistent with other research showing that emotional impulses for giving shut down in the presence of analytical information.
    Dean Karlan

    Roots and Remedies: Persistent poverty and violence amongst urban street youth in Liberia

    Policy Issue:

    Poor and underemployed youth can be found at the hearts of riots, revolutions, civil wars, and petty and organized crime. In post-conflict countries, where state capacity is weak, frustrations are many, and jobs are few, policymakers are particularly concerned about these youth’s potential to destabilize society. Liberia, which recently suffered through 14 years of civil conflict, has named “youth disempowerment” as one of two major threats to durable and lasting peace. Liberia’s 2009 Youth Fragility Assessment sums it up this way: “the youth… simply wish for… the prospect of some day earning an income, even a modest one. For many, this is the impossible dream... the challenge is to make it possible, soon and for everyone.” The stakes are extremely high. The World Bank writes: “while much of the world has made rapid progress in reducing poverty in the past 60 years, areas characterized by repeated cycles of political and criminal violence are being left far behind….," and calculates a civil conflict costs the average developing country roughly 30 years of GDP growth. A quarter of the world’s population (1.5 billion people) live in places plagued by recurring and endemic violence.

    How can governments and NGOs raise employment and reduce the risk of violence among these poor and risky populations? Aid programs increasingly focus on helping youth through markets, especially through microenterprise development. The logic of this assistance, however, rests on the existence of market failures among the poorest of the poor: imperfect credit markets, or production discontinuities such as minimum start-up costs or low returns to small investments. Cash grants or credit are needed to achieve minimum scale. Street youth with no assets and weak social networks may be particularly vulnerable to this trap. But so far there has been little research proving the existence of market failures or the ability of aid to help.

    Meanwhile, both psychologists and economists have begun to explore the extent to which behavioral skills – such as impulse control, time preferences for immediate vs. delayed gratification, risk aversion, conscientiousness, setting and keeping long range goals, and being deliberate in choices – contribute to poverty. In a war zone, being highly present-focused might indeed be the optimal survival strategy. During peacetime, however, the absence of such preferences could in theory constitute a second source of persistent poverty: a behavioral poverty trap, leading to low savings rates, wastage of any windfalls, and high-risk behavior including involvement in drugs, crimes, and violence. Importantly, core principles underlying much economic and psychological theory assume that such preferences are fixed in young adulthood, leading anti-poverty projects to take a paternalistic approach. Again, little research has critically examined these assumptions.

    Counter to conventional wisdom, preliminary investigation suggests that a behavioral transformation program, akin to cognitive behavioral therapy, can be successful. This finding, if true, would be groundbreaking, challenging conventional economic and psychological models of behavior, which posit that preferences and behaviors are stable and difficult to change, especially among adults.

    Context of the Evaluation:

    The study is designed to disentangle how cash and capital constraints versus dysfunctional preferences and behaviors contribute to the poverty and violence of the young men and women living on Monrovia’s streets, and to create an inexpensive and scalable program that will reduce poverty, violence, and social instability among unstable youth in Liberia and beyond.

    On the preferences and behaviors side, the questions are (a) What role do cognitive and behavioral traits play in persistent poverty and violence?; (b) Are these cognitive and behavioral traits malleable in adulthood, and is sustained cognitive behavior change possible?; and (c) Will changing them reduce poverty and violence? On the market failures side, the questions are (a) What role does the lack capital and credit play in persistent poverty and violence?; (b) Will unconditional cash transfers relieve this constraint and reduce poverty and violence?; and (c) Do capital constraints and cognitive and behavioral deficiencies interact, and must both constraints be relieved to reduce poverty and violence in sustained way?

    Description of the Intervention:

    This “Sustainable Transformation for Youth in Liberia” (STYL) program is an experimental program, being jointly run by the research team and two NGO partners: CHF International and NEPI. As of mid-2012, STYL will have enrolled approximately 1,000 youth. Youth are recruited from urban areas where large numbers of underemployed youth congregate, and are targeted for the program on the basis of exhibiting the following characteristics: persistently poor; homeless; lack of self-discipline; angry, hostile, depressed; idle and not busy with productive pursuits; involved in organized or petty crime, and/or conflict with the law; and getting drunk and/or high regularly.

    The STYL study is currently experimentally evaluating two interventions, each on its own as well as in concert with the other.

    A behavioral Transformation Program (TP), akin to cognitive behavioral therapy (similar to Alcoholics Anonymous) and life-skills programs. The TP has the aims of bolstering the cognitive and social skills necessary for entrepreneurial self-help, raising youth’s aspirations, and equipping the youth to reach them. The TP involves half-day sessions 3-times a week, for 8 weeks, held in groups of 20 led by 2 counselors. The curriculum includes modules on anger management, impulse control, future orientation and planning skills, and self-esteem.

    An unconditional cash grant program, in which youth are given a large $200 one-time cash grant disbursement. How the grant is spent is entirely up to the recipient, though a grant orientation session provides some basic training on financial management and business planning.

    Individual youth are randomly assigned to either receive the TP; the cash grant; the TP and then the cash grant; or neither.

    The plan is to conduct both short-term and long-term endline surveys to capture treatment effects, through surveys and behavioral games. If the basic interventions are shown to be effective, the research team hopes to further improve program design through iterative tweaking and testing, including varying cash grant size and TP length and intensity, and trying additional potentially complementary interventions, in order to help policymakers achieve goals most cost-effectively.

    Results and Policy Lessons:

    Forthcominng

     

    Media coverage of this project:

    Chris Blattman Talks with NPR's Planet Money team here.

    Chris Blattman and Paul Niehaus in Foreign Affairs here.

    Jason Margolis interviews ex-combatants and researchers Tricia Gonwa and Chris Blattman.

    Financial Education vs. Access to Finance in Transnational Households

    Over three percent of the world’s population now lives outside their country of birth. Officially recorded remittances, from migrants sending funds to those in their countries of origin, exceeded US$400 billion in 2013. Yet little research has been carried out on these financial transactions. In an ongoing study in the Philippines, researchers are examining the effects of financial education and access to savings and loan products on remittance flows, savings, and small enterprise development.
     
    Policy Issue:
    The number of individuals living outside their countries of birth reached 230 million people in 2013, representing over three percent of the world. Many of these migrants send remittances back to their countries of origin. In fact, officially recorded remittances to developing countries exceeded US$400 billion in 2013, with top recipients of India (US$71 billion), China (US$60 billion), the Philippines (US$26 billion), and Mexico (US$22 billion). These remittances are an important but poorly understood type of financial transaction. To date, there is little evidence about how migrants make their remittance-sending decisions.
     
    Past studies in Mexico and El Salvador have shown that households receiving international remittances have low savings levels. In many remittance-receiving countries, policymakers are creating programs to encourage households to channel more of their remittance income to savings, education, and investment in small businesses. Providing migrant workers and their families with financial literacy training or access to financial services may be one way to improve their welfare. While researchers have studied the impacts of financial education and financial access independently, no study has looked at the possible complementarities between these two types of programs. This study examines how combining financial skills training with access to savings and loan products impacts financial decision-making and savings of transnational migrant households.
     
    Context:
    The Philippines is the second largest migrant-sending country and the third largest remittance receiving country in the world. Nearly 90 percent of service sector international migrants from the Philippines in 2010 were women. Among these, 70 percent were domestic workers. The group of recently departed Overseas Filipino Workers (OFWs) and their families left behind in Cabanatuan, Philippines and surrounding localities namely Talavera, Sta. Rosa, Palayan, and Gapan are the primary target group of the study.
     
    Description of Intervention:
    Researchers are examining the effect of financial education and access on remittances, savings, and small enterprise development. Researchers partnered with the Overseas Workers Welfare Administration (OWWA) to randomly select a sample of 1,800 transnational households from the full population of workers going abroad to work from Cabanatuan, Philippines and surrounding localities. Participants in the program were then randomly assigned to one of four groups:
    1. Financial education only: The families of migrants in this group were invited to attend a workshop on financial education in the Philippines administered by local partner Alalay sa Kaunlaran (ASKI), Inc. The day-long workshop emphasized the importance of remitting into bank accounts in the Philippines to build long-term savings and investment. Migrants in Singapore or Hong Kong, countries where ASKI is present, from households belonging to the financial education treatment group will also be invited to a financial education workshop. 
    2. Financial services and products only: Migrants and their families in this group were invited to open bank accounts through local partner, the Bank of the Philippine Islands (BPI). Migrant families in the Philippines were also offered microloans for small enterprise investments via ASKI.
    3. Financial education + financial services and products: Migrants’ families and migrants in Singapore or Hong Kong were invited to attend the financial education workshops. They were also offered the savings and loans products by BPI and ASKI at the end of the training. 
    4. Comparison Group: Individuals received no financial training and were not offered financial services or products.
    Researchers will conduct follow-up surveys twelve months after the financial education workshops and product offerings to measure their impact on savings, remittances, and small enterprise investment.
     
    Results:
    Results forthcoming.

    The Impact of Food and Cash Loans on Smallholder Farmers in Zambia

    Many farming households turn to off-farm work to make ends meet between harvests, reducing the amount of time they can invest in increasing their farms’ productivity. In ongoing work in Zambia, researchers are testing the relationship between scarcity, labor supply and agricultural productivity. Selected farmers receive access to either cash or food loans during they lean season that they are responsible for repaying at harvest. Researchers will track a variety of outcomes including yields, labor supply, food consumption and how impacts vary within the household and by loan type. In a pilot, already completed, food loans were shown to increase food consumption during the lean season, reduce the portion of households engaging in off-farm work, and increase wages. In the pilot, both take up and repayment rates were over 90 percent and results clearly established the relevance of hunger as a driver of labor supply decisions. 

    Policy Issue:
    Many farming households turn to casual day labor, typically on other better-off farms, to make ends meet between harvests, which often means that farmers do not have time to invest in  their own land. If farmers neglect on-farm activities that are important for production, such as weeding or application of fertilizer, then off-farm work can result in lower yields on farmers’ own fields. With a poor harvest, families are less able to set aside resources to last through the next season, increasing their reliance on off-farm work. Providing credit, either in the form of food or in cash, could allow farmers to spend more time on their farms. Farmers would not be forced to find off-farm income to feed their families between harvests, and would therefore be able to spend additional time applying fertilizer, weeding, or harvesting the crop, which would increase yields. In the long run, this gain in productivity might increase incomes by more than farmers could earn through casual labor. Although existing research looks at the impact of agricultural loans on crop productivity, this is one of the first studies to look at the impact of credit on how farmers allocate labor.
     
    Context of the Evaluation:
    Small-scale farming is the primary source of income in rural Zambia, and 72 percent of the work force is employed in agriculture. Most farmers are poor, and in Chipata District, where this evaluation takes place, the average income is less than US$500 per year for a household of six people. Sixty-three percent of households in rural Chipata are classified as “very poor” and almost all households lack electricity and piped water.
     
    Zambia’s long dry season allows for only one harvest per year, which means that the harvest must generate income to last the entire year. Payments for input loans and other debts are often due at the time of the harvest, exacerbating the difficulty of setting aside resources for the next year. As a result, many households turn to off-farm, casual labor during the hungry season (January to March) to cope with short-term financial needs. In the study sample, 60 percent of young men reported engaging in casual labor during the previous season.
     
     
    Description of Intervention:
    Researchers are testing the effects of food and cash loans on labor supply and agricultural productivity. They have completed a preliminary, pilot study to establish the relationship between food shortages and labor supply. A larger study is ongoing.
     
    Pilot study: In the pilot study, researchers tested the effect of  food loans on farming households’ food consumption, casual labor supply, and wages. The loan program offered households one 25-kilogram of ground maize flour per month during the lean season (January to March). Farmers were expected to repay the loan at harvest (in June) with three 50-kilogram bags of unground maize. Each bag of ground maize was worth about 45 Zambian kwacha (US$9) and each bag of unground maize was worth 50-65 kwacha (US$10-13), resulting in an interest rate of 11-44 percent over the loan period.
     
    Researchers evaluated the loan program in 40 rural villages, each within a day’s drive of Chipata town and with 15-25 small-scale farmers. In 10 villages, all eligible households (those with 1-5 hectares of land) were offered the loan (“full treatment villages”). In 20 villages, households that expressed interest in the loan entered a lottery, through which half were selected for the loan program (“partial treatment villages”). Ten additional villages served as the comparison group and did not receive loans.
     
    Households that took up the loan could pick up the maize flour at one of ten distribution centers in January, February, and March. To repay the loan, households brought maize for repayment to a central point in each village in June.
     
    Full study: Over the next two planting seasons, researchers will compare the in-kind maize loans with cash loans and test the impact on farmers’ labor allocation and crop yields. As in the pilot study, loans will be disbursed in January and repayment will be due in June. Regardless of loan type, borrowers will be able to repay with either maize or cash. In order to measure how the effect of receiving loans persists over time, some villages will not receive loans during the second year of the full study.
     
    Results and Policy Lessons:              
    Pilot study: There was high take-up of the loans, and villages where loans were offered saw an increase in food consumption, a decline in the number of households engaging in casual day labor, and an increase in wages for those who did engage in casual labor. The impacts were larger in villages where all eligible households could take out a loan.
     
    Take-up and repayment: In full treatment villages, 90 out of 104 eligible households (87 percent) took out a loan. In partial treatment villages, all 104 households that were offered the loan program took out a loan. Ninety-eight percent of borrowers in full treatment villages and 95 percent in partial treatment villages repaid their loans in full.
     
    Food consumption:In full treatment villages, the probability of missing a meal in the previous week was 16.5 percentage points lower than in comparison villages, where 36 percent reported that a family member had to miss a meal. In addition, the number of meals eaten in the previous 24 hours increased by0.2, from a base of 1.7 meals in comparison villages. The loans had no significant effect on the probability of missing a meal or the number of meals eaten in partial treatment villages.
     
    Labor supply and wages: The share of households working in casual labor declined in both full and partial treatment villages. In comparison villages, 60 percent of households engaged in casual labor during the agricultural season, but this figure was 9 and 8 percentage points lower in full and partial treatment villages, respectively. Wages also increased in villages where lean season casual labor fell.
     
    Full study: The study is ongoing. Results are forthcoming.
     

    Credit, Change, and Lost Sales: The Surprising Impact of Small Change on a Firm’s Profitability in Kenya

    Highlighting the importance of carrying correct change helped firms to change their behavior and increase profits.

    Policy Issue:

    Small businesses in developing countries are thought to face numerous challenges in their efforts to expand and increase profitability. While credit and human capital constraints (i.e. lack of training) have frequently been highlighted as potential barriers, another constraint may be limited attention. Most people face constant tradeoffs between investing attention in work versus in other matters, such as homelife. The poor may face comparatively greater challenges in maintaining their homefront (because of higher rates of illness, for example), which may divert attention away from their work. It is possible to test whether this limited attention reduces productivity by focusing on one particular business decision for small firms: how much change to keep on hand to break larger bills. Not having proper change can have an impact of a firm's profit level. If a firm does not have sufficient small bills or coins to give a buyer change, the buyer may choose to buy the item elsewhere and the firm would lose the sale. Evaluation estimates suggest that the average firm in Western Kenya loses 5 to 8 percent of profits due to lost sales because of a lack of small change.

    Context of the Evaluation:

    The businesses included in this evaluation, which were randomly selected from ten market centers in Western Kenya, included barbers, tailors or other artisans, market vendors, and hardware shops. The typical business was small - only 16 percent of businesses had any salaried workers - and approximately 55 percent of firms were operated by women. Losing sales because of insufficient change was a common problem for these firms. At the baseline, over 50 percent of firms reported having lost at least one sale in the previous 7 days because they did not have sufficient change. Furthermore, firms spent over 2 hours on average looking for coins or small bills in the previous 7 days. Even firms that had not lost any sales in the past week spent over an hour and a half searching for change for customers.

    Design of the Intervention:

    To understand whether firms run out of change because they do not fully internalize the profits they are losing, the evaluation proceeded in two phases. First, a field officer visited each firm on a weekly basis to administer a short “changeout” questionnaire, which asked a number of questions about change management, including the number of times they ran out of change (i.e. the number of “changeouts”), the number of lost sales due to changeouts in the previous 7 days, the value of these sales, how much time they spent searching for change, and how often they gave or received change from nearby firms. The survey also asked about total sales and profits. Although the survey did not provide any training or information about change, or any direct "reminders," it may have served as a catalyst for firms to start altering behavior, as lost sales and profits due to poor change management became more salient. To measure this effect, the start date for the changeout questionnaire was randomized across firms. This enabled an estimation of the impact of the visits themselves, by comparing lost sales between those firms that started the survey earlier to those that started later.

    The second intervention more explicitly emphasized the costs of having insufficient change. After following firms for several weeks, researchers calculated the lost sales for each firm due to insufficient change as well as the market average. This information was then presented to a randomly selected subsample of firms.

    Results and Policy Lessons:

    Impact on frequency of changeouts: Veteran firms, meaning firms that had joined the survey early, were, on average, 6 percentage points less likely to experience a changeout in a given week than firms who we had just begun the changeout survey. Firms who were randomly selected for the information intervention were similarly 8 percentage points less likely to experience a changeout than those not selected.

    Impact on lost revenue and profits: Veteran firms, because they had fewer changeouts, also lost less income due to lost sales. Specifically, lost revenue for veteran firms decreased by 32 percent and lost profits decreased by 25 percent. Additionally, they also lost fewer sales whileaway from their shop to get change during the day. The information intervention also reduced lost revenue by 43 percent and lost profits by around 33 percent.

    Impact on behavior: Firms that had been in the survey longer seemed to bring in more change to work each morning, but the results were not statistically significant. These veteran firms also visited nearby firms for change on average 2.4 fewer times per week and shared change with other businesses on average 1.1 fewer time per week. Similarly, upon receiving the information, intervention firms began receiving change 1.6 fewer times per week and sharing one fewer time per week. Estimates indicate that overall, behavioral changes resulted in a 12 percent increase in profits.

    As the weekly surveys provided no skills training, nor any direct information, it is most plausible that they served as a reminder which made the importance of changeouts and the amount of money being lost more salient. While the information intervention provided some new information (the average behavior of other firms), the firm-specific information would have already been known to firms if they had processed the information. Thus, a likely explanation for the results is that firms were not paying attention to the lost sales to change, and the interventions reduced the cost of processing the information already available to them.

    Ex-combatant Reintegration in Liberia

    For post-conflict societies, the challenges of reintegrating ex-combatants and war-affected youth are likely to far outlast and outsize the formal demobilization, disarmament and reintegration (DDR) of ex-combatants. These programs, conducted in war’s immediate aftermath, form an important part of a policymaker’s post-conflict toolkit. While ex-combatants receive special policy attention, poor and underemployed men are also widely considered a threat to political stability.

    Find a more in-depth policy report here. 

    Context of the Evaluation:

    In Liberia, where the bulk of the population is young, poor, and underemployed, many rural youth continue to make their living through unlawful activities, including unlicensed mining, rubber tapping, or logging. Many of them are ex-combatants, and some remain in loose armed group structures, doing the bidding of their wartime commanders. While the security situation has steadily improved since 2003, the government, the UN, and NGOs fear that these youth are a possible source of instability, particularly in hotspot regions where mining, rubber tapping, or logging and the allure of “fast money” attract young men from around the country. These youth may also be recruited into regional conflicts as mercenaries. Agriculture is and will continue to be a major source of employment and income for rural Liberians. The international NGO Landmine Action (LMA, now known as Action on Armed Violence) runs an innovative and intensive agricultural training program, targeting ex-combatants and other high-risk youth in rural hotspots.

    Description of the Intervention:

    The LMA program is broader and more intensive than most ex-combatant reintegration programs, and is designed to rectify some of the main failings of prior demobilization programs: it is oriented towards agriculture (the largest source of employment in Liberia); it provides both human and physical capital; and it integrates economic with psychosocial assistance. It also targets youth at natural resource hotspots that presented the most immediate security concerns.

    LMA took youth selected for the program to residential agricultural training campuses, where they received 3-4 months of coursework and practical training in agriculture, basic literacy and numeracy training, psychosocial counseling; along with meals, clothing, basic medical care, and personal items. After the training, counselors facilitated graduates' re-entry with access to land in any community of their choice.  Graduates received a package of agricultural tools and supplies, valued at approximately US$200. The program's total cost is approximately $1,250 per youth, excluding the cost of constructing the campuses. The program was designed to give youth a sustainable and legal alternative to illegal resource extraction, ease their reintegration into society, reduce the risk of re-recruitment into crime and insurrection in the future, and to improve security in hotspot communities.

    LMA recruited twice as many youth as it had space for in its programs, and researchers randomly assigned half of the youth to treatment (receiving the program), and half to a comparison group (not receiving the program). By comparing these two groups 18 months after the program, researchers can see the effect of the intervention on agricultural livelihoods, shifts from illicit to legal employment, poverty, social integration, aggression, and potential for future instability.  Despite massive migration, 93% of the youth were found at the time of the endline survey. The qualitative study included observation and a series of interviews with 50 of the youth.

    Results and Policy Lessons:

    Engagement in agriculture: More than a year after completion of the program, program participants are at least a quarter more likely than the control group to be engaged in agriculture, and 37% more likely to have sold crops. Interest in and positive attitudes toward farming are also significantly higher among program participants. 

    Illicit activities:The program had little impact on rates of participation in illicit activities like mining, but those who participated in the program do spend fewer hours engaged in illicit activities, as agricultural hours seem to substitute somewhat for hours spent in illicit activities.

    Income, expenditures, and wealth:  There was a sizable increase in average wealth from the program, especially in household durable assets, but no change in current income (last week and last month), savings or spending for the average program participant. Overall, the evidence suggests that cash cropping provides periodic windfalls from sales, and that these are mainly invested in durable assets (and not necessarily in agricultural inputs or equipment).  Qualitative observations also suggest that access to markets may have been an important constraint on success.

    Social engagement, citizenship, and stability:  There were small but positive improvements across most measures of social engagement, citizenship, and stability. While not all of the estimated impacts are large enough to be statistically significant, they nevertheless suggest a small but broad-based reduction in alienation and some gains in stability. The evidence on aggression and crime, however, does not point to a significant reduction in illegal or aggressive behaviors among program participants.

    Interest and mobilization into the election violence in Cote d’Ivoire:Conflict broke out in Cote d’Ivoire shortly before the launch of the program evaluation.  Self reported rates of interest in the violence and mobilization were fairly low among the sample population, but they were especially low among program participants – they tended to report a third less interest in or links to recruiters and recruitment activities. Given the difficulty of shifting such behaviors, these impacts of the program are regarded as extremely promising.

    For a policy memo with detailed results, as well as recommendations for reintegration, livelihoods, and poverty alleviation programs in Liberia, please see here.

    What Generates Growth in Microenterprises? Evidence from Sri Lanka

    This study examined constraints that might be keeping small businesses in developing countries from growing and hiring more employees. To test interventions that might help spur growth and hiring, researchers offered a sample of male-owned businesses with two or fewer employees different combinations of capital, incentives to hire new employees, and management training. 

    Policy Issue: 

    Very small businesses are abundant in many developing countries, but few grow to the point where they employ more than one person. If even a small percentage of these microenterprises were able to scale up enough to hire a few employees, a significant number of new jobs could be created. While some research suggests that injections of capital into microenterprises increase profitability, there is little evidence suggesting that this profit increase would help a business grow enough to require additional employees. Is it possible to generate growth from microenterprises which leads to significant job creation?

    Context:

    The study focuses on microenterprises with two or fewer employees, located in urban areas of, Colombo, Kandy, and Galle/Matara in Sri Lanka. The 1,525 microenterprises in the sample were engaged in either the retail sector or manufacturing and service industry. Only male-owned enterprises were included in the sample because previous work showed that capital alone had a much larger effect on male-owned businesses.[1]

    Details of the Intervention:

    In this randomized controlled trial, three constraints thought to inhibit firm growth were relaxed: capital, labor, and entrepreneurial skills. A matched savings program was used to address capital constraints (details below). To incentivize hiring additional employees, a wage subsidy was used, and an entrepreneurial training based on the International Labor Organization’s (ILO’s) Improve your Business (IYB) program was used to improve entrepreneurial skills. Enterprises in the sample received either zero, one, or two of the interventions to determine which one, or combination was most effective. The group of businesses that did not receive any support was tracked as a comparison group.

    Matching Savings Program

    In November 2008, enterprises in this group were offered a matched savings bank account with National Savings Bank. Participants were told that they could deposit, but not withdraw, funding until August 2009. Savings were initially matched at a rate of 50 percent up to 1000 Sri Lankan Rupees (LKR). The match rate was later raised, ultimately reaching a maximum match of 100 percent up to 5000 LKR. Just before the account was unlocked, 5000 LKR was added to every account, regardless of previous deposit patterns to ensure that all enterprises in this group had some capital injection.

    Business Training

    The ILO’s IYB training program is one of the most widely implemented entrepreneurship training programs, reaching approximately 4.5 million people around the world.[2] IYB is a five day program intended to generate growth in microenterprises. The modules cover marketing, buying, costing, stock control, record keeping, and financial planning. The Sri Lanka Business Development Centre (SLBDC) delivered the ILO’s IYB training. Additional training on hiring and managing employees was added to the core modules.

    Wage subsidy program

    The subsidy provided a flat amount of 4000 LKR per month for a period of six months to businesses in this sample that hired an additional employee to work at least 30 hours per week. A flat amount of 2000 LKR per month was offered for an additional two months. The initial subsidy of 4000 LKR represented about half of the earnings of a typical unskilled worker.

    Semi-annual follow-up surveys were conducted in 2009, 2010, 2011, 2012 and early 2013. The large number of surveys over a long time period enabled researchers to trace the trajectory of impacts.

    Results and Policy Lessons:

    Project ongoing. Results forthcoming. 


    [1] De Mel, Suresh, David McKenzie, and Christopher Woodruff. "Returns to capital in microenterprises: evidence from a field experiment." The Quarterly Journal of Economics 123.4 (2008): 1329-1372.

    De Mel, Suresh, David McKenzie, and Christopher Woodruff. "Are women more credit constrained? Experimental evidence on gender and microenterprise returns." American Economic Journal: Applied Economics (2009): 1-32.

    [2] “Start and Improve Your Business Programme,” International Labor Organization, accessed June 3, 2014, http://ilo.org/empent/areas/start-and-improve-your-business/lang--en/index.htm.

    Savings, Subsidies and Sustainable Food Security in Mozambique

    When smallholder farmers see how fertilizer increases their yields, they may continue using it. In this study in Mozambique, where very few farmers use agricultural inputs, researchers evaluate if giving farmers fertilizer subsidies encourages them to continue using fertilizer when subsidies run out. This study also measures the impact of coupling the subsidies with different types of savings accounts. Do subsidies, savings accounts, a combination of both, or none of the above, lead farmers to invest in their farms, grow more food, and earn more income?

    Policy Issue:

    Motivated by the recent escalation in food prices around the world, several countries, including Kenya, Malawi, Rwanda, and Zambia, have implemented large-scale fertilizer subsidy programs to boost food security and small farm productivity. If people are unaware of the benefits of using fertilizer, or do not know how to use it, then subsidies may be a useful tool to give people experience with using fertilizer, and promote adoption. However, a long-standing question is whether one-time or temporary provision of subsidized fertilizer can get households to adopt it long-term, or whether input use and farm production eventually return to previous levels after subsidies are phased out. The key to determining whether provision of subsidies can lead to long-term growth, even after the subsidies are no longer in effect, is to discover if farmer practices change fundamentally, or whether these practices change only (if at all) when subsidies are being offered.

    Context:

    Large-scale emigration, economic dependence on South Africa, and a prolonged civil war hindered Mozambique’s development until the mid 1990s. Agriculture accounts for almost 29 percent of the country’s GDP, however agricultural technology adoption has been slow in Mozambique compared to other counties in the region. Most of the farmers interviewed for this study had little or no experience with application of chemical fertilizers and other agro-chemical inputs.

    Description of Intervention:

    Researchers are investigating the impacts of fertilizer subsidies on smallholder farmers in rural Mozambique, and in particular, whether providing farmers opportunities for savings accounts can help subsidies achieve a greater sustainable impact. Vouchers for fertilizer were distributed randomly to a sample of farmers. In partnership with Banco Oportunidade de Moçambique (BOM), researchers also randomized offers of one of several different savings accounts interventions, to see how the subsidies and savings accounts complemented one another.

    The sample comprises farmers with access to some type of agricultural extension service, either through an NGO or government entity, so that they have access to information on how to use fertilizer if they choose to use it. Researchers worked with two sub-groups of farmers. The voucher randomization (VR) sample is comprised of farmers randomly distributed (or not distributed) vouchers for fertilizer. The VR sample enabled researchers to examine the interaction between voucher receipt and savings incentives.

    Treatment Groups:

     

    No savings offered

    Offered regular interest rates

    Offered individual savings with 50% match

    Offered group savings with match

    Received voucher for fertilizer

    Treatment Y-0

    Treatment Y-1

    Treatment Y-2

    Treatment Y-3

    Did not receive voucher for fertilizer

    Treatment N-0

    Treatment N-1

    Treatment N-2

    Treatment N-3

    As shown in the table, the VR sample consists of three treatment groups which received different combinations of interventions, and a comparison group which did not receive an intervention. In treatment group one, farmers were offered a savings account with standard BOM interest rate. Treatment group two was offered “matched savings” accounts, where farmer received matched funds equal to 50 percent of his or her average savings balance (up to 3,000 MZN, or US$112) during a defined match period. (The match rate is the percentage of the average balance in the account that is contributed by the project at the end of the match period, not an annual percentage rate.) In treatment group three, farmers were offered a savings match with a group incentive, where the match rate rises or falls in accordance to the average account balance of the entire group. Farmers are not required to use the match for fertilizer, yet the match amount does allow each farmer to afford the inputs provided in the fertilizer package, which many farmers could not afford otherwise.

    During meetings with farmer groups, project staff discussed the importance of savings and keeping part of one’s harvest proceeds for fertilizer and other agricultural inputs for the next season. Farmers were also given specific instructions about using the fertilizer package for maize, and information on BOM savings services and locations. After farmers completed the baseline survey, savings accounts were offered, and project staff assisted interested farmers in filling out the forms to open an account. Farmers then could make their initial deposit at a BOM branch or a Bancomovil, a mobile bank that services many of the sites.

    During follow-up surveys planned for 2012 and 2013, researchers will collect data on per-capita income and expenditures, maize yields and use of seed varieties and fertilizers, and the creation and use of savings accounts.

    Results:

    Results forthcoming.

    For more on Michael Carter's research, click here.

    The Role of Mobile Banking in Expanding Trade Credit and Business Development in Kenya

    Policy Issue:

    Access to finance is a critical constraint for small businesses everywhere.  Credit provided by up-stream suppliers to down-stream firms (“trade credit”) can relax the constraints on capital. Trade credit can help small businesses, like retail shops and kiosks, to purchase non-perishable goods for resale and free up resources for short- and long-term uses.  However,the provision of this type of credit may be limited by high transaction costs, up-stream liquidity constraints, and concerns over repayment.  As trade credit agreements in low-income countries usually involve small amounts, judicial systems are unlikely to enforce repayment of loans in court. Without a system to distribute small loans in an economically feasible manner and manage repayment, suppliers have little incentive to extend this service. This project evaluates a new method of extending trade credit facilitated by mobile banking and inventory management technologies and will shed light on its potential to foster small business development in a developing country context.

    Context of the Intervention:

    Working with Financial Sector Deepening (FSD), a Kenyan Trust focusing on development of financial services for the poor, researchers will evaluate a trade credit product that uses a mobile network to increase the efficiency of loan origination and repayment.  In collaboration with FSD, a large supplier of non-perishable products (the Coca Cola Bottling Company (CCBC)), and a Kenyan bank (Equity Bank), researchers will conduct a randomized evaluation of the new trade credit product.

    This technology has the potential to overcome two particular challenges.  First, by reducing the transactions costs of making repayments, new mobile technologies make it economically feasible to offer trade credit products requiring small, frequent repayments. Second, the centralized information system allows centralized monitoring of both credit and repayment histories.

    Description of the Intervention:

    CCBC uses 240 independently owned distributors to deliver its products to about 40,000 retail outlets in Kenya. These retailers typically make purchases (in cash) and take delivery of product once every few days, depending on expected demand and available cash on hand.  There is presently no pre-ordering of any sort in the supply chain, and no short-term credit. All payments are made in cash at or just prior to the time of delivery.

    CCBC will automate their supply chain, enabling every case of product to be recorded and tracked at the retailer level.  A natural next step in the automation process is to integrate financial transactions.  This project takes advantage of this advance in supply chain automation to build in a trade credit product.  In particular, the tracking system will allow real-time monitoring of both cash and mobile phone-based transactions, and hence enable more efficient administration of credit contracts. Critically, the trade credit will be provided not by the independently owned distributors, but by Equity Bank via its in-house mobile banking platform. This is the feature that makes the trade credit product viable for a larger number of retailers.

    The project will involve working with 1,200 retailer selling Coke products in and around Nairobi, Kenya. Of these, two thirds will receive the trade credit while one third will serve as a comparison group.  While all credits will be repayable to Equity Bank, the distributors of Coke products will be given explicit incentives to ensure repayment for half the retailers to whom the credit is offered.  The study will assess the commercial viability of the product, the role of distributors in administering it, and its impact on business development and employment creation.  If the intervention is profitable for lenders and borrowers, the project partners are keen to expand the credit product at a much larger scale and to other suppliers.

    Results and Policy Lessons:

    Results forthcoming.

    Savings Accounts for Rural Micro Entrepreneurs in Kenya

    Testing the impact of formal savings accounts on savings, productive investment and expenditures among small-scale entrepreneurs in rural Western Kenya.

    Policy Issue:

    Hundreds of millions of people in developing countries earn their living through small-scale businesses with very low levels of working capital. Approximately a quarter  of households living on less than US$2 per day have at least one self employed household member. Enabling small-scale entrepreneurship has long been identified as a mechanism to alleviate poverty, and substantial attention has been paid to microcredit as a means to promote entrepreneurship. However, the impact of microcredit schemes on business outcomes, especially for the very poor, is still largely unknown, and many banks which target the poor realize low or negative profits. In this context, some have argued that the focus needs to be put on savings instead of credit, since evidence suggests that individuals should be able to save their way out of credit constraints. But this strategy demands accessible opportunities for people to save securely – an uncertain prospect for the vast majority of the poor who still lack access to formal banking services of any kind.

    Context of the Evaluation:

    In Kenya, small enterprises have been estimated to account for more than 20 percent of adult employment and 12-14 percent of national GDP, but only 2.2 percent of surveyed microentrepreneurs had a savings account with a commercial bank prior to the study. Some individuals have demonstrated a willingness to pay a premium to save securely, often receiving negative interest or tying their funds up in illiquid savings and credit associations. The fact that people take up these costly strategies suggests that the private returns to holding cash at home are even lower, possibly due to the risk of theft, appropriation by one’s spouse or other relatives, or because individuals tend to over-consume cash on hand.  In the village of Bumala, a market center along the main highway connecting Kenya to Uganda, a community-owned bank sought to increase access to formal banking by offering savings accounts to villagers. Still, two years after opening, only 0.5 percent of daily income earners had opened an account, citing lack of information about the bank and the inability to pay the account opening fee as primary reasons for low take-up.  

    Description of Intervention:

    Working in collaboration with the Bumala village bank, researchers studied the importance of savings constraints for self-employed individuals in rural Kenya. Field workers identified market vendors, bicycle taxi drivers, and self-employed artisans who did not already have a savings account, but were interested in opening one. Of the eligible individuals, 163 were randomly selected to be offered the option to open a savings account at no cost, with a minimum balance that could not be withdrawn. These accounts offered no interest and included substantial withdrawal fees. Thus, the de facto interest rate on deposits was negative. A comparison group of 156 individuals was not barred from opening an account but was offered no assistance in doing so.

    To test the prevalence and impact of savings constraints, researchers examined 279 self-reported daily logbooks kept by individuals in both the treatment and comparison groups. These logbooks included detailed information on market investments, expenditures and health shocks, making it possible to examine the impact of the savings accounts along a variety of dimensions. Field workers met with respondents twice per week to verify the logbooks were being filled out correctly, and paid respondents a small amount for each week the logbook was completed correctly. This information was supplemented with administrative data on savings from the bank itself.

    Results and Policy Lessons:

    Impact on Savings Account Take-up: Eight percent of respondents refused to even open an account, while another 39 percent opened an account but never made a deposit. Of those who did utilize the savings accounts, women made significantly larger deposits, a median of 100 Ksh,(US$1.42, equivalent to 1.6 times average daily expenditure) compared to the median deposits for men of 50 Ksh ($0.71).  This gender difference increased for those who deposited more.  Account usage was very strongly correlated with wealth, suggesting that the accounts were mostly useful for people above subsistence levels.

    Impact on Savings Behavior: Reported average bank savings were higher in the treatment group. Females in the treatment group did not decrease other forms of savings in animal stock and ROSCAs (informal groups that require members to make regular contributions to a savings pot that is periodically given to one member).  There are various possible explanations for the continued use of ROSCAs by women. It is possible that ROSCAs are valuable as a source of credit and emergency insurance; that they provide a form of savings commitment through social pressure; or that changes in ROSCA participation could not be captured during the study due to the long  savings cycles (up to 18 months).

    Impact on Business Investment: Four to six months after they were offered, bank accounts had substantial positive impacts on business investment for women, with a 37.5 percent increase in average daily investment. This suggests women faced large negative returns on money they saved informally, and those constraints were important for the businesses they run.  While very large on average, this treatment effect is also quite heterogeneous: only 57 percent of women in the treatment group made at least one deposit within the first 6 months of opening the account, and only 43 percent made at least two deposits within that timeframe.

    Impact on Private Expenditures: Findings suggest that higher business investment in the treatment group led to higher profits, as measured through household expenditures.  The accounts had a significant positive impact on expenditures on the entire sample, with this effect most strongly concentrated for market women. About 6 months after having gained access to the account, the daily private expenditures of women in the treatment group were on average 37 percent higher than those in the comparison group. Daily expenditure on food was also significantly higher.

     

    Strategic Household Savings in Kenya

    How important are differences of opinion within the household for making financial decisions? In this study, married couples in rural Kenya were given the opportunity to open joint and individual bank accounts at randomly assigned interest rates. Researchers assessed if couples with different preferences worked together to save in the highest return account, or if these differences led to poor financial choices. Results indicated when savings preferences in the household diverged, individuals were more likely to prefer individual accounts, and made less efficient financial decisions. 

    Policy Issue:

    Despite their low incomes, individuals in developing countries save using a wide variety of informal savings devices like illiquid rotating savings and credit associations. Researchers have widely noted the popularity of these informal devices and an attendant puzzle: these devices are often risky, complex, and costly when compared to simple alternatives, such as storing savings at home. What then, makes these costly savings practices attractive? Anecdotally, many informal savers cite the need to protect savings from misappropriation by other members of the household, particularly spouses. How important is this need in determining individual savings choices? Does it become more important as individual preferences for how much to save diverge? And how much are individuals willing to sacrifice to gain additional control over household savings levels?

    Context:

    While formal financial services in Kenya have traditionally been outside the reach of the poor, banks have recently begun to offer lower cost formal savings products marketed to a broader swathe of the population. This project was implemented in collaboration with Family Bank, a formal bank in Kenya that offers products suitable for lower income savers. Family Bank offers savers the option of both individual accounts, which can only be accessed by the account owner, and joint accounts.  When spouses jointly own an account, either member can make deposits and withdrawals at will.

    Description of Intervention:

    All married couples participating in the intervention were given the opportunity to open up to three accounts with Family Bank: an individual account for the husband, an individual account for the wife, and a joint account. Each account was randomly assigned a temporary 6-month interest rate, which ranged from zero percent (the norm for Family Bank accounts) to 10 percent. The interest rate intervention consequently created random variation in not just the absolute rate of return available to a couple, but also the relative rates of return between the three different accounts. This offered a simple way to measure efficient savings behavior: an efficient couple should always choose to save in the account with the highest rate of return.

    In addition to the interest rate intervention, half of couples who opened at least one individual account were randomly selected for an information sharing treatment. The goal of this treatment was to test whether individual accounts were used to hide information from spouses. This treatment enabled the spouse of an individual account holder to retrieve information on the balance of the individual account at the bank (provided both the spouse and the account holder consented to the information sharing treatment).

    Finally, all couples in the intervention were asked a series of questions at baseline to measure levels of patience and preferences over savings levels. These questions were used to construct a measure of preference heterogeneity in the household. Individuals were also asked about their own and their spouse’s use of a variety of savings devices – this information was used to construct a measure of how well informed spouses were about one another’s finances.

    Results:

    Responses to Experimental Interest Rates

    All couples responded robustly to the experimental interest rates. However, those couples with badly aligned savings preferences (the “poorly matched”) were more than twice as likely to save in individual accounts and 34 percent less likely to save in joint accounts. Furthermore, poorly matched couples were insensitive to relative rates of return between the three different accounts on offer. In contrast, those couples who were well matched on savings preferences responded robustly to relative rates of return. Consequently, poorly matched couples sacrificed at least 52 percent more potential interest rate earnings when compared to their well-matched peers.

    Responses to the Information Sharing Intervention

    Over 40 percent of couples selected for the information sharing intervention did not consent to it, which suggests that individual accounts are used to hide resources from spouses. Furthermore, those couples who were poorly informed about each other’s finances at baseline were significantly less likely to consent. These poorly informed couples were also significantly more likely to save in individual accounts and marginally less likely to save in joint accounts. However, measures of intrahousehold information sharing and preference heterogeneity were uncorrelated with one another.

    Overall, these results suggest that when savings preferences in the household diverge, individuals strategically exploit secure savings devices to control the overall level of household savings. However, even when preferences over how much to save are well aligned, individuals may still value secure accounts if these accounts allow them to hide savings from others.

    To learn more about this Simone Schaner's research, click here

    Simone Schaner

    The Impact of Exporting: Evidence from a Randomized Experiment in Egypt

    This study evaluates a program that seeks to improve market access by matching Egyptian carpet making SMEs with buyers in western markets.

    Policy Issue: 

    In many developing countries, small and medium enterprises (SMEs) employ a substantial portion of the population.[1] Many of these countries have government-sponsored trade-facilitation programs[2] based on the assumption that increased exports will spur local SME growth and help local economies. However, several studies have questioned the assumption that exportation to western markets raises aggregate productivity.[3] Additionally, the actual impact of increased SME market access on household welfare is unknown, making it difficult for policy makers to assess whether trade-facilitation methods are a cost-effective poverty reduction strategy. Finally, little is known about what specific firm characteristics are conducive to exportation.  Evidence on this subject would allow policy makers to implement more targeted export promotion programs.

    Context of the Evaluation: 

    The project is set in Fowa, a peri-urban Egyptian town with a population of 65,000. The business owners participating have a per capita income of about $400 annually, well below the national average of $2,250. The study focuses on small enterprises with a single employee, the majority of which have not knowingly exported in the past.

    Details of the Intervention: 

    A baseline survey conducted in July 2011 collected information from a sample of carpet-making SMEs on production techniques and quality levels, firm owner characteristics, and owners’ household indicators. A randomly chosen set of these firms were offered the opportunity to produce orders generated by a local carpet distributor destined for retailers in the United States and Europe. The orders were for a significantly higher quality carpet than the typical product produced by these firms for the domestic market. Periodic surveys capture changes in firm profits and weaver incomes. The goal of this study is to offer evidence on the link between exportation, firm performance, and family income levels that will help policy makers both assess the role of export promotion in poverty reduction and design more targeted programs.

    Results and Policy Lessons: 

    Project ongoing. Results forthcoming. 


    [1] IFC: Scaling-Up SME Access to Financial Services in the Developing World 2010

    [2] Cadot, Olivier, et al. 2011. "Impact Evaluation of Trade Assistance: Paving the Way." Where to Spend the Next Million?

    [3] Melitz, Marc J. 2008. "International trade and heterogeneous firms." New Palgrave Dictionary of Economics.

    Clerides, Sofronis K., Saul Lach, and James R. Tybout. 1998. "Is learning by exporting important? Micro-dynamic evidence from Colombia, Mexico, and Morocco." The Quarterly Journal of Economics 113.3: 903-947.

    Bernard, Andrew B., and J. Bradford Jensen. 1999. "Exceptional exporter performance: cause, effect, or both?." Journal of international economics 47.1: 1-25.